Self-Employment Tax Essentials for Enrolled Agents to Build Relationships With Entrepreneurs
People who start businesses have plenty of expertise in their professions; but, unless their business is a tax practice, they probably need help from an outsider with their tax matters. Because they understand about working to provide top quality in their businesses, they are inclined to respect enrolled agents for achieving the top credential in the tax industry.
Self-employed individuals face the challenge of reserving a sufficient amount of income for payment of their tax liability directly to the government. Business proprietors don’t have the convenience of tax withholding from paychecks. They also are lacking employer handling of contributions to Social Security and Medicare. Entrepreneurs pay these taxes as the self-employment tax. Payment for this tax is submitted along with regular income tax.
An enrolled agent course covers all the calculations you have to conduct for the self-employed. The multitude of tax considerations actually provides a testament to your value. Just explaining to a self-employed independent contractor who works alone all the tax consequences he faces is enough to inspire him to immediately assign the burdensome calculations to an enrolled agent.
The first level of advice you give a self-employed individual is to maintain accurate business records. He should account for income throughout the year. Too many new independent contractors operating solo wait until the year is over to receive 1099s reflecting their income. This is a bad habit developed as an employee waiting to receive an annual W-2.
One danger is that not all income will be reported on 1099s. In addition, income tax and self-employment tax are calculated on net earnings of a business. Therefore, a record of ordinary and necessary expenses is also required. Your tax CPE keeps you well informed about using year-to-date earnings to project profit and tax liability for the full year.
Self-employed people have to pay four estimated tax payments throughout the year. This is how they are expected to meet their tax obligations over time just like the withholding from paychecks of employees. Estimated tax payments include self-employment tax. Payment of self-employment tax cannot be deferred until the annual computation on Schedule SE.
In order to focus your tax practice on advising the self-employed, you should concentrate your enrolled agent CPE on estimated taxes. These are normally four equal installments. But a business owner with widely fluctuating income can send unequal amounts. He only needs your help later to complete Form 2210 demonstrating the periods when income was earned. Usually, estimated tax payments are based upon a safe harbor calculation involving income in the preceding year. That’s one of many reasons that the self-employed remain steady clients over multiple years for an enrolled agent.
The especially overlooked component of estimated taxes is the self-employment tax. By thoroughly addressing all components of estimated tax payments, you save self-employed individuals from severe underpayment penalties.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.