Self-Employed vs. Employed Taxes Tax

Self-Employed vs. employed taxes Tax issues are one of the biggest issues in business and/or employment as they can seriously affect the bottom line of any organization, small or large and can affect the individual on a multitude of levels (Bruce, 2002). With regard to taxation there are also various aspects of employment type that determine type and amount of tax and how that tax is paid. For the most part the two main classifications of employment type are employees and self-employed individuals.

These two classifications can make significant differences in the way taxes are paid and the amount of those taxes, to both the state and federal governments and in some states even the local regional governments. This work will briefly discuss these differences and in a form of comparison of advantages and disadvantages of each classification with regard to taxation. The main and most enduring difference between the employed and the self-employed is the manner in which taxes are collected.

Taxes for federal state (and possibly local) governments are collected within the payroll system for employees and these taxes are then paid to the government entity via the employers system of payment (usually quarterly) (Bruce, 2002). Self-employed individuals are themselves responsible for making quarterly tax payments directly to the government entity. If an individual self-employed person fails to do this than all taxes due (sometimes with penalties and interest) are due in a lump sum at the close of the tax year.

This change is often a challenge for the self-employed as so much of the focus of most businesses is on taking care of overall business needs rather than thinking about personal expenses (Buffington, 2005). There is also an identifiable tax situation that affects newly self-employed individuals more than others, in the first year of self-employment the individual is required to pay (quarterly) the same amount of tax they paid the previous year as an employee.

Though most will see a return on this at the close of the tax year they are likely not going to earn anywhere near the amount they earned as a salaried or wage employee so this tax amount may be a serious expense in the first year that must be saved and accounted for from a business that might not even be turning a profit in the first year (Buffington, 2005).

This issue is compounded for the self-employed when retail/sales tax is added into the mix as these payments are also required quarterly, not payable when collected. This issue is simply a non-issue for an employed person as the retail/sales tax is again paid quarterly by the employer and the employee deals only with direct transaction, calculations, most of which are done automatically. These additional taxes are collected by the individual self-employed person where they are applicable, which is the majority of U.S.

states and are now even collected for some online transactions in certain states, regardless of the funds availability when they are due. So, again this is something the self-employed person must take into consideration on almost a daily basis, i.e. saving collected retail/sales tax whenever it is paid or expect to write difficult checks when taxes come due.

Additionally, understanding the sales tax laws in different states where you do business is an essential bit of knowledge that the employee only has marginal responsibility for but the self-employed person is ultimately and singularly accountable for. The actual amount of taxes that individual employees vs. self-employed individuals pay is roughly the same annually, excluding that self-employed individual will pay the percentage of some federal taxes that the employer would normally pay and therefore.