Accounting is a big part of running a business. Even for solo-preneurs, a basic understanding of how much money must be saved for taxes, how and when to file, and what can be deducted as a business expense is something that must be learned.
Teacher Indie encourages online teachers and business owners to work with an accountant to keep everything straight. See this interview we did with Cliff Highman of Digital Nomad Accounting about how to go about getting your tax situation set up for success.
Feeling the stress? Don’t worry – taxes for online teachers actually isn’t as bad as it seems. Here, we’ll break down the basic situation of taxes for self-employed online teachers and offer a few helpful hints.
Taxes for online teachers: Do I need to file taxes quarterly?
In most cases, anyone who is self-employed and expects to pay more than $1000 in taxes in a given year, after subtracting federal income tax, must pay quarterly taxes. This includes those of us working on contracts. If you receive one or more Form 1099s at the end of the year, you most likely need to pay quarterly taxes.
If you teach online but are an employee of a school or company (you receive a Form W-2), you probably don’t need to pay quarterly taxes.
Failing to pay taxes on time may result in a penalty from the IRS. This fine is generally 5% for each month that the payment is late, not to exceed 25% of the total taxes. If you don’t file within 60 days, you may receive a $100 fine. Not necessarily enough to break the bank, but these fines are easy to avoid just by sending in your taxes every quarter.
Not sure of when quarterly taxes are due? Check the IRS website for current information, but here are the latest posted dates:
Q1: due April 15
Q2: due June 15
Q3: due September 15
Q5: due January 15 of the following year
The quarterly tax form is available here. The IRS provides also a printable quarter-page form to mail with your check.
One important note: If you have formed an LLC or Corp, you must pay both self-employment tax (personal, basically in line with what standard employees have taken from their checks) and taxes for your business. In many cases, your pay from the ‘company’ is deducted from the company’s income so you aren’t taxed on that money twice. For example: if you write yourself paychecks from your business bank account and deposit them into a personal bank account. The IRS website offers much reading about how to go about doing this. Speak with an accountant if you have any questions.
Taxes for online teachers: How much do I owe?
The federal self-employment tax rate for 2014 was 15.3%. If you earn six figures, your rate may be higher. This tax covers the stuff that is typically covered by employees’ income tax: social security, disability, and Medicare. If you earn over $400 per year from self-employment, you must pay this tax.
State tax rates vary. Check with your state’s Department of Revenue for local rates.
Taxes for online teachers: What specific expenses can teachers deduct?
Educators can take the Educator Expense Deduction of up to $250 if they work in a K-12 school for at least 900 hours in a given year. Unfortunately, homeschool teachers and college-level educators aren’t eligible for this one. Neither are instructors working outside public, private, or religious school systems. If you’re teaching guitar lessons to private students, this deduction won’t help you.
Here are things that can be deducted by all educators, as they qualify as education and/or business expenses:
- Books and teaching materials
- Business supplies
- Computer equipment and software
Additionally, other expenses related to your business can be deducted. Always keep your receipts. A nice helpful hint for the digital age is to create a folder in your email inbox titled “Expenses and Receipts 2017” (or whichever year it is) and move any emailed receipts to that folder. That way everything is in place for tax time.
Taxes for online teachers: Helpful hints
Saving for taxes
Part of the trick of staying on top of taxes for online teachers is to actually save the money. That’s the hard part, right? You may find it helpful to have a specific account set up for keeping money aside. Track is an app that automatically sets aside money for taxes each time a deposit is made into your account. This makes it super easy.
Another option is to do it manually. Many open a business savings account specifically for this purpose. Each month, they transfer money from the business checking into the business savings, and let it sit there until tax time. The money is ready to go when needed, all you must do is transfer it back to the checking account and write a check (just don’t spend it before the check clears!).
I’ve typically found the IRS to be pretty efficient when it comes to cashing checks. It shouldn’t take more than 7-10 business days.
Remembering to pay
Put a note on your calendar each due day. As long as the check is in the mail by the due date, you’re safe. In addition to Track, the IRS2GO app is helpful for remembering to pay and making sure you’re following the correct procedure.
Again, having an accountant on-hand is the best practice. As your business grows, the expense becomes more than justified.
By staying on top of saving for taxes, the entire scenario becomes much less stressful. If you can comfortably put aside 25% of your income from teaching online into tax savings, you’re on the right track! You may even have some left over for a celebratory night on the town on January 15.