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16 responses total.

Be prepared to pay a lot.  :(

Be sure you have documentation on anything that you claim as a deduction from
your self-employed income.  This include logs of usage for your computer and
your car.  IRS has an income tax book for small business owners, free.

First of all, just assume that about 40 to 50% of what you earn will go to
taxes.  Roughly 11% goes to social security, another 4-5% for state income
tax, and anywhere from 18-30% for federal tax.  I routinely put half of any
check into a tax saving account.  Gives me a nice cushion at the end of the
year, and allows me to spread out the estimated tax payments the next year
more evenly.  At a minimum you need about 35% put away.  

Then you make your estimated payments from your savings account as they come
due.  

The other 50-60% is what you have to live on and run your business on.  Be
sure to keep those checking accounts separate.  The IRS does not like
comingled funds.  And keep good receipts so you can deduct all your business
expenses from your income.  If you don't have a receipt (or other record) you
can't deduct it from your income.  

You can pay a lot to have a tax expert help you, but I recommend tax software.
MacIntax or Turbo Tax, depending on your platform, from Intuit, both handle
all of the issues that you are likely to run into as a self-emplyed person.
For a bonafide small business, you can still get help, as they have products
aimed for that market (new this year) . I haven't used the latter, but based
on their other stuff, I'd recommend it.

The small business software I have seen has not been very friendly for
consultant-type work.  Did Intuit write software that lets me track hours,
and assign them to clients.  I've seen lawyter software, but it was too fixed
in concrete (couldn't change field labels to "unlawyerly" words).  I'm still
looking fro something that will track hours, bill clients (including outside
purchased services or goods), and still keep my books straight for the IRS.

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Having 2 bank accounts, personal and business, is supposed to protect you in
case the IRS decides to freeze your business accounts.  With a separate
personal account you can still pay bills.

The IRS requires those two bank accounts.  Get a copy of the "red book"  IRS
publication 334.  It tells you exactly what you need to do to keep
straight with them.  It's available on-line, and the A2 library has last
year's version.  Free, issued yearly, and the best print resource for what
the IRS really thinks. You also may want to pick up the "blue book", the
IRS publication 17, which is for personal income taxes.  The red book is
for sole proprietors, mainly.   

Sorry, the real name of the "red book" is Tax Guide For Small Businesses.

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Well, I have already saved myself one huge mistake.  I was planning on putting
30% of all earnings into a savings account for taxes.  Now I know that I
should put away 50% for the first year until I see how much taxes are going
to be.
Thanks!

Be sure you are meeting the quarterly deposit deadlines if you are self-
employed.  

I talked to a tax accountant today and he told me I would be putting away
plenty if I put away 35% of income after expenses.

I agree, you only pay 50% on amounts that exceed expenses and the standard
deduction, and then only if you  exceed about $26,000 or more after expenses.
To estimate tax, divide your previous year's tax by 4.  Some years you will
be over, some under, but there will never be a penalty.  

The IRS told me that separate personal and business accounts were not
required, just suggested in case of audits.  For me this would be ridiculous.
I would have to put all my checks into the business account, then take most
of the money back out and put it into a personal account.  My business
expenses are primarily rent, phone, electric and grex membership, plus Jim's
living expenses (health insurance, property taxes).  It would be silly to keep
moving money back and forth between two accounts just so I could write checks
with a different account number.  I have never been audited.  Be sure not to
declare a loss 3 years out of 5 (but I have done so and not been audited),
or they might put some restrictions on what you can claim as a loss - this
is for people who claim that they are flying to the Bahamas every winter to
do research for a book they hope to write and make money from.

I just checked, a single person pays no federal tax on the first $8000 or so,
except for about 15% FICA, then up to about $25,000 it is 15%, then over that
28%.  Plus the MI tax of 4.6%.  So the tax on the first $8000 is about 20%
(FICA and MI) or $1500 and on the next $17,000 it is about 35% ($5500), or
a total of about $7000 on $25,000.  Less than 35%.  If you expect to earn
more, amounts over $25,000 would pay close to 50% tax.

I keep a record of everything I spend on the business in paper and pencil,
and also save the receipts.  My record is dated.  Check out Schedule C (long
form) for suggested categories.  I categorize the letter that I send out to
my various agencies every year as advertising.  Most of the categories don't
fit well, I am creative but also list several on the blank lines.
It gets easier after the first year.

You can count your grex membership as a business expense?  I guess I no longer
have an excuse not to become a member.  ( I like tax deductions and I love
grex!)

Grex is essential to my business, I use to to send my translations (email)
and to do web research, and I just posted a homepage (advertising).  I listed
it together with phone expenses, but I suppsed it could also be considered
advertising.  I also get help with translations on grex, and meet other people
in the same business, and do online chats in Bulgarian, and get help using
my computer.....  (And keep from going crazy working by myself).

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