While self-employment allows you to decide your own hours, work flexibly, and pursue in something you’re good at, it also means you must look after your own finance and taxes. Although being self-employed seems like the dream, you do have to make sure you handle a lot more than just the regular showing up to work – this includes your taxes to be paid and paying your bills. Our guide everything you need to know about tax for the self-employed.
Know Your Entity
One of the most important decisions you must make as you start your journey toward self-employment is deciding what your business structure will be. Whether your company will get a federal tax id for sole proprietorship, an LLC, a partnership, an C-corporation, or S-corporation will affect how your taxable income flows through to your personal tax return. The type of entity decides your federal tax id number.
How Much Will You Pay?
Self-employed individuals have a different tax situation compared to an employee. When you’re self-employed, you pay income tax on your profits, not your total income. The self -employed usually must pay their National Insurance Contributions in addition to their income tax. Government registration is required if you are a sole trader. The purpose of registering is to pay your proper amounts of taxes through your nonprofit tax id number for Self-Assessment and Class 2 National Insurance. Otherwise, you may face stiff penalties down the road.
Every year HMRC will write to you, updating about to complete your tax return. You can do this online or via a paper form. There is a deadline for when you have to complete your return and another deadline for when you need to pay your tax.
Value Added Tax (VAT)
If you are self-employed, you will have to pay VAT if the turnover of your business is more than £85,000 in a financial year. If you are VAT registered, you have to charge the tax on all goods and services you supply. Almost everything comes under the 20% standard VAT rate although some items only attract 5% while others, such as children’s clothes and food are zero-rated.
Who Calculates The Amount Of Tax I Owe?
- If you submit your tax return on paper, HMRC normally calculate your tax for you and send you a tax calculation, form SA302. In order to receive a paper form SA302, usually you must submit your paper tax return before 31 October and ask HMRC to work out your tax, by ticking the relevant box on the tax return.
- If you submit your tax return online, HMRC’s online system will calculate your tax automatically, and you can view the calculation online or print it out.
Separate Business Bank Account
You do not need to have a separate business bank account if you are self-employed. However, if HMRC investigate your business they may ask to see your bank statements. So, if you want to keep your personal costs private it is better to run a separate business bank account.