To Defer or Not to Defer: Understanding Self-Employment Tax Deferral

Mar 26, 2024 | Taxes

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If you’ve been around TSJ for a while, you’ll know that being your own boss can be immensely rewarding.

As a high-earning coach or consultant, you no doubt appreciate the autonomy and flexibility that traditional employment lacks.

But there is a tradeoff.

Managing finances becomes your responsibility as a business owner. This includes self-employment tax.

In this month’s discussion, we’ll talk about what self-employment tax is, who is responsible for paying it, and how to make sure it’s getting paid correctly.

Need Help Understand Tax Deferral Options?

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Tax Savvy Jessica designs turnkey Tax Strategy Plans for 6-figure coaches and consultants who want to pay less in taxes, ditch the numbers stress, and free up more of their money to build their dream life.

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What is self-employment tax?

Self-employment tax is a tax that individuals who work for themselves must pay to fund Social Security and Medicare. It’s essentially the self-employed version of the payroll taxes that employees and employers split in traditional employment. For 2024, the self-employment tax rate is 15.3% on the first $147,000 of net income and 2.9% on anything above that.

What does it mean to defer taxes?

You might be wondering what exactly it means to “defer self employment tax.” Deferring taxes means delaying payment to a future date. The idea is that deferring can allow you to invest that money and earn a return before handing it over to the IRS.

What kind of investments for my coaching or consulting company can I spend my deferred tax money on?

Lots of things! Do you want to go after some personal development opportunities like a business course, coaching group, or seminar? You can pay for these things with deferred tax income. Are you ready to upgrade your CRM, invest more in marketing, or expand your business? These are other investments you can potentially pursue.

What’s the point of deferring my taxes if I’m just going to have to put money aside to repay them anyway?

Think of deferment as a short-term strategy for boosting the financial health of your business. Instead of paying your taxes immediately, you can redirect your money to investments that can grow your business to create more revenue overall.

Is it ever a good idea to not defer?

Sometimes. While deferring taxes may free up cash in the short term, keep in mind that you’ll eventually have to pay your taxes. If you’re not great at managing your finances as it is, you probably shouldn’t add more financial risk by deferring tax payments for the future.

What procedures do I need to follow if I choose to defer?

  1. Assess your eligibility. Check the IRS guidelines or talk to your tax professional to find out if you can benefit from deferral.
  2. File Your Quarterly Tax Payments: Make sure you calculate your expected self-employment taxes for the year and pay your estimates on time.
  3. Keep Your Records in Tip-Top Shape: Keep excellent records of your income, expenses, and quarterly payments.
  4. Pay Your Tax On Time: When the time arrives to pay your deferred taxes, make sure you pay up to avoid penalties and charges!

Want Expert Help? Let Tax-Savvy Jessica Take the Wheel.

Here at TSJ we love a good list of tax planning strategies. But what do we love even more?

Getting the chance to rock our clients’ worlds with tailor-made tax strategies and services, alleviating overwhelm and rekindling the joy in running their businesses!

Tax Savvy Jessica has 15+ years of experience helping her clients navigate complicated tax rules like these.

Let us handle the taxes so you can run your business in peace.

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Hi, I’m Jessica.

I’m the passionate tax-pert behind Tax Savvy Jessica. I spent more than 10 years performing audits for the IRS. My experience there taught me how to understand taxes from the perspectives of both taxpayers and the IRS.

I started Tax Savvy Jessica because I’m passionate about helping small business owners understand their taxes so they can use their money to build the life they want.

Free up more money to build the life you really want.

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Whether you’re new to entrepreneurship or you’ve owned your own business for years, see what you can write off as a freelance coach or consultant.

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