For me, one of the downsides of being self-employed is that I no longer get to “enjoy” the fact that my employer is in charge of deducting my taxes from my salary, and just providing me with a regular, net income each month. I enjoy the simple life, and being on the receiving end of a regular monthly payment in a job with a W-2 certainly counts as simple for me!
However, inevitably, self-employment brings many benefits, so the choice is a trade-off that I gladly take, and I just deal with the annoying book-keeping stuff as best I can. If you’re just starting out as a freelancer, and thinking about doing it full-time at some point – or if you’ve just jumped into self-employment – you’ll also have to deal with this kind of stuff.
When self-employed, you’re not only responsible for paying your own income taxes, but also self-employment taxes. Self-employment taxes are basically your Social Security tax and Medicare tax. Typically, your employer would not only automatically withhold these from your paycheck, but also pay half of the amount, thereby reducing the contribution that you have to pay. However, now that you’re self-employed, the “employer’s half” now becomes your expense too, because you’re now also the employer!
Check out this page on the IRS website for a good explanation of how this all works when you’re self-employed.
These taxes represent a significant cost of being self-employed, and deter some folk from pursuing their dream of starting up their own business. However, they’re not insurmountable, and you can reduce them, depending on which legal business entity you decide to operate, but you should definitely be aware of them, and account for them in your financial business plan.