Child Entrepreneurs: Don't Forget About Taxes

If you're self employed, you know that taxes can take a big chunk out of your profits. Self employed people are subject not only to federal income taxes, but to self employment taxes as well. As a result, this can be the biggest expense for a self employed person, and can be quite a shock if you're not prepared for it.

If you're not familiar with self employment tax, basically it is Social Security and Medicare tax on people who work for themselves. This tax is used to fund our Social Security program, including retirement benefits, disability benefits and survivor benefits.

Self employment tax is similar to the payroll taxes withheld from the pay of most employees. The biggest difference is that as a business owner, you are required to pay both the employee and the employer's share of the Social Security and Medicare taxes. So while employees of a company pay 7.65%, self employed people pay 15.3% in Social Security and Medicare taxes.

Even worse, this tax is on top of your regular income tax. For example, if you are in the 15% tax bracket, your taxes on your net profit could be over 30% (15% federal tax plus 15.3% self employment tax).

When do you pay this tax? Our tax system is a pay-as-you-go, which means you are required to pay taxes on your income as you earn that income. For employees, taxes are withheld automatically from their paycheck, but self employed people must send in estimated tax payments to comply with the pay-as-you-go rule.

The general rule is that you must make estimated tax payments if you expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and tax credits. Estimated tax payments are due on April 15, June 15, September 15 and January 15 of each year (or the next day if the 15th falls on a weekend or holiday). Failing to make estimated tax payments on time could result in a penalty even if you are due a refund when you file your tax return.

Even if you don't have to make estimated tax payments, it's a good idea to set aside 20-30% of your net profits (depending on what tax bracket you fall into) so that you will have enough to pay your taxes when it's time to file your tax return.

As kids get older, it is inevitable that they will want more money to buy things like clothes, music, their first car, etc. This will prompt many kids to get a job or even start their own business to earn money for all the extra "stuff" they want.

For most kids, the last thing they are thinking about when they get a job or start a business is whether they will need to file a tax return or owe taxes on the income they earn. And most kids won't even make enough to file, but some children will be required to file a return based on the amount and type of income they earn.

The rules for kids and taxes can sometimes be different than those for adults, so how do you know if your child is required to report their income?

Continue Reading 'Is Your Child Required To File A Tax Return?'...

You've heard the bad news... business income is subject to self employment tax on top of regular income tax, even for kids in business.

The good news is that kids, just like any self employed business owners, can deduct reasonable and necessary business expenses from their income. Knowing the tax deductions for self employed individuals can help your kids save money on taxes.