Negative Tax Consequences for the Self-Employed

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From [the nest], Fraser Sherman discusses some of the tax risks you many encounter if you are self-employed. Fraser writes:

Audit Risk

As an independent contractor, it’s easier for you to hide income than when you work 9-to-5 for someone else. The IRS knows that, so your tax return may get extra scrutiny. Deductions for travel, business dinners and entertainment expenses can draw an auditor’s eye, as does writing off a home office. The base risk of an audit is 1 percent so even if self-employment doubled the risk, the odds are against an audit. There’s no reason to turn down a deduction you’re legitimately entitled to — you just need to keep the records, in case the IRS ever asks you to prove it.

Estimated Taxes

Instead of tax withholding, you must typically file quarterly estimated tax payments. This is intended to cover what you owe in both self-employment and income tax. It requires you sit down, total your taxable income and figure your tax four times a year, unless your income is so steady you can make four equal payments. If you underestimate by too much, the government can slap a penalty payment on you to teach you a lesson for next time.


Estimated tax is only the beginning of the paperwork. When your business sells anything subject to sales tax, you have to file with the state to collect it, then collect and submit regular payments. If you have employees, you’re the one responsible for figuring their payroll taxes and withholding the right amount, unless you pay someone to handle the work for you. Even if you’re a one-person shop, you need to track payments, receipts and expenses to keep your taxes accurate.

Read the full story at Negative Tax Consequences for the Self-Employed

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