If you're not already self-employed but think you might like to be, this could the best phase of your life to do it. Lots of 40- and 50-somethings realize that middle age is the best time to put the skills and talents they have developed in their careers to work for themselves rather than an employer. If this is you, there are a few special things you need to consider when it comes to taxes.

Self-Employment Taxes

The employer's half of social security and Medicare taxes, called FICA taxes, needs to be paid even when you're self-employed. The difference between working for somebody and working for yourself is that the self-employed pay both sides of the FICA tax — your half and the employer's half. Don't despair; in the end, some of the self-employment tax you pay is deductible. The deduction doesn't totally credit the amount you'll pay, but it eases the pinch.

Being self-employed requires a change in how you think about the money you receive for the work you do. When you get a paycheck from an employer, your FICA and income taxes are already withheld. When you're self-employed and your customer pays you for your work, taxes aren't automatically withheld. It's important to realize that a big chunk of their payment to you isn't really yours to keep — it's owed as income tax. Simulate the withholding your employer used to do by automatically putting aside at least 30 percent of what you get from customers (after expenses) as your withholding for taxes. Consider this tax savings account untouchable — just like the withholding your employer used to take. If you don't, and you use that money for expenses during the year, you'll get caught short of cash come tax time.

Once you've been self-employed for a while, you'll be able to finesse the 30 percent rule of thumb to a number that more accurately reflects your taxes due. If this change means reducing the amount you set aside, avoid the temptation to spend the extra — set up a retirement account and start investing!

Sole Proprietors

You are a sole proprietor if you have self-employment income and have made no effort to set up another business entity. Most people — especially people with consulting income and no employees — prefer to be sole proprietors because there are no setup fees or extra tax returns to file.

One of the negatives of a sole proprietorship is that the business dies with the owner. This might not matter to you if you're a consultant without employees, but it would be unworkable if your business needed to transition to another owner after your death or retirement. If this is a concern, consider creating a separate business entity such as a corporation, limited liability company, or partnership.

“Self-employed” and “sole proprietor” are essentially synonymous. At year-end, many of your customers will send you and the IRS 1099 tax forms reporting the income they paid you. You might hear self-employment sometimes referred to as “being paid on a 1099.”

Sub S Corporations

If you have employees or are running a business where there is a level of financial liability risk that can't be cost-effectively covered by personal or commercial insurance such as a restaurant or a landscaping business — your lawyer might advise you to incorporate. A corporation is a separate legal entity with its own tax ID number. Being a separate entity from you means that the entity doesn't die when you do and that the money that is at risk in the event of a lawsuit is only the money in the corporation, not your personal assets. You may need additional professional liability insurance if you are selling advice — as a lawyer or a financial planner, for example — but for most other types of businesses, the corporate veil, as it's called, offers plenty of liability protection. When you incorporate, you'll be given the option to take a “sub S” election (if you qualify under the Internal Revenue Code subchapter S requirements). By doing this you retain the corporate structure, but the income or losses of your corporation will be passed through to your personal tax return rather than being taxed at higher corporate tax rates.

You'll own shares of your corporation as a shareholder, and your corporation will pay you — even though you're the owner — as an employee with regular paycheck tax withholding. Your accountant might refer to this as “being paid on a W-2.” At the end of the year, your accountant will prepare a K-1 report for your personal return and a separate corporate tax return.

LLCs and LLPs

Your business lawyer might recommend a limited liability company or a limited liability partnership instead of a corporation. LLCs and LLPs have members instead of corporation stockholders. They pass their income down to the members just like sub S corporations do, and they offer liability protection. Your accountant will prepare the same tax return for the LLC/LLP as she would for a corporation. Many people prefer LLC/LLPs because they are more flexible to manage than corporations.