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Whether you’ve started a new business and gone out completely on your own, or are just starting to take on a few side projects in today’s freelance economy, you will most likely be surprised when your first tax season comes around.

If this isn’t your first year, you know what we’re talking about: Self-employment taxes.

How Much Will You Owe?

The answer to how much you will owe in taxes depends, of course, on how much you earn. There are several other factors as well, depending on the tax credits and deductions that you are eligible for.

Regular Taxes

Everyone who has ever had a “regular job” is familiar with the list of money that was withheld from your paycheck. The largest amounts are usually for federal and state income taxes, based on an estimation as to which tax rate/bracket you will be in, and the number of dependent exemptions that you claimed on your Form W-4.

For most regular employees, the employer is legally required to withhold those funds and send them to the IRS and state agencies. At the end of the year, your tax return determines if you paid enough through withholding, paid too much (and are owed a refund), or paid too little (and owe taxes).

When you are self-employed, however, (or when you earn income from work where you have no employer), then you are still going to be required to pay taxes on that income: It just wasn’t taken out incrementally during the year as you earned that money, and this can cause a problem (a tax bill) when April 18 comes around.

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The Taxes Pile Up

So, for starters – and depending on your income tax bracket and deductions - you will owe federal taxes of between 10%-39.6% of the income you make from freelancing or working for yourself. (The bracket is based on all income you make, even if you still have a regular job and earn a little from freelancing.) Then comes state income taxes, where the rates vary: Five states have no tax on income, while the rest vary between about 3% and 7%.

Self-Employment Taxes

Employers also withhold FICA taxes from the paychecks of regular employees. As a result, when you are an employee, your paycheck shows deductions of 6.2% for Social Security and 1.45% for Medicare. What you may not know is that your employer also has to contribute the same amount towards those funds on your behalf. You were only paying half.

Now that you’re self-employed, you will have to pay the full amount of each: 12.4% of your adjusted gross income toward Social Security and 2.9% toward Medicare, for a combined 15.3% in taxes (plus 0.9% if you earn more than $200,000) on top of your regular income taxes.

If the thought of potentially owing 50% or more in taxes on the income you made last year is painful, then congratulations, you are normal. If you enjoy the thought, there are psychiatrists available in your area.

Fortunately, there are ways to take some of the pain out of your potential tax burden – and also some opportunities to lower your eventual tax bill. Here are some tips to get you through it:

1) Keep Good Business Records

The best way to prepare for tax season is to run your business like it’s a business. Whether you are doing it full time or as a side gig to your regular job, keep records of at least this basic key data:

  • What jobs you did
  • How much you earned
  • How much you paid for equipment, fuel or other expenses
  • If you sold products, how much they cost versus how much you charged

The more detailed you can be, the better. While using a bookkeeping program is the best way to keep on top of things, if your business is basic, it isn’t a must-do. But you do have to be able to show where your income came from.

Also, keep in mind that there are many tax deductions your new business may qualify for, such as use of your vehicle, a home office and even utility bills. Keeping good records will help you at tax time, and beyond.

2) Keep Good Tax Records

In addition to keeping track of your business activities and expenses, which can help with your taxes, you may receive several tax-related documents throughout the year. If you provide services to businesses, for instance, they will likely issue you a Form 1099, and a copy of that will also be sent to the IRS. Businesses are required to file a 1099 when they pay another business or contractor $600 or more in a given tax year.

If your side business is small and just getting started, you will be reporting the income you make from it on your personal income tax return (Form 1040), unless you have you have created a partnership or corporation. Keep your tax documents together, but separate your business activity from your personal family records, as this will make it easier when tax time comes.

3) Pay Quarterly Estimated Taxes

In your first year, it might be easy to forget to put some of your earnings aside for taxes. But by the second year, the IRS will probably have sent you a notice, and possibly a fine.

If you will owe more than $1,000 in taxes come April 18 (or still owed more than $1,000 in taxes when you filed your return last year), you will likely be required to pay estimated taxes four times a year.

If you fail to make your estimated payments (or don’t pay enough), the IRS may fine you, even if you don’t end up owing taxes at the end of the year.

4) See a Professional

So many Americans seem intent on using a do-it-yourself system to prepare their own taxes. While the popular online systems do offer the tools to do it, they just can’t offer the same assurance as a CPA can.

Whatever your particular situation, a tax professional has probably seen it before and can help maximize your deductions and tax credits, while also making sure that you stay in compliance with all federal and state tax laws. A CPA won’t promise you a refund, but odds are that they will save you money and help you develop a strategic tax plan. Added to that is the value of a good night’s sleep on April 18!

Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for consultants across the country. His website, www.cpaforfreelancers.com, has a resource section with how-to articles and information for freelancers.