- 1 Tax Tips For Self Employed Workers
- 2 Self-Employed Tax Questions: What Tax Forms Are Needed For the Self-Employed?
- 3 12 Common Questions and Answers About Self-Employed Tax Deductions
- 3.1 1. I’m Newly Self-Employed. What Can I Deduct?
- 3.2 3. I Work Out of My House. Can I Deduct Things Like Internet and Phone Bills?
- 3.3 5. What Marketing and Advertising Expenses Are Deductible?
- 3.4 6. If I Do Some Business While on a Family Trip, Is the Trip Deductible?
- 3.5 7. What Are Some Other Common Self-Employed Business Deductions?
- 3.6 8. What About Meals and Entertainment?
- 3.7 9. Are There Special Rules for Health Insurance?
- 3.8 10. What Is the Home Office Deduction?
- 3.9 11. Won’t I Get Audited If I Take the Home Office Deduction?
- 3.10 12. Do I Need to Keep Receipts to Claim Deductions?
- 4 self employed tax questions
Tax Tips For Self Employed Workers
Tax time is right around the corner. I’m sure I don’t have to tell any of you that though.
If you are like me, it’s probably a time that you dread. I’ve always dreaded tax time though, not just since I’ve switched to being fully self employed.
I am just an unorganized person. No matter how organized I actually am, compiling everything still overwhelms for me. And now that I am self employed, there are many more things to compile, such as business expenses that I’ve incurred over the past year.
Luckily, the hard part should already be done. As a self-employed person, you should already be paying quarterly estimated taxes, which will include your estimated self employment taxes. Let’s just hope that you don’t owe any more than that though!
Here are my tax tips for self employed workers, freelancers, side hustlers, and more. As always, I am not a tax professional so please contact one if you have any questions.
My first of my tax tips for self employed workers is to gather all important business-related documents that you need.
If you haven’t already, you need to make sure you actually have all of the documents you need in order to file your taxes. These should all be easily accessible. Some like to keep paper copies, whereas others might scan all checks and receipts onto their computer. Either choice is fine, just make sure everything is kept safe and secure so that it is readily available once tax time comes rolling around.
Some of the documents and receipts that you might need to gather, depending on your business and your situation, include:
- Health insurance and medical expenses.
- Retirement contributions.
- Expenses from supplies, equipment, and so on.
- Information related to home office expenses if you plan on deducting that. That could include internet fees, “rent,” and more.
- Receipts from business-related meals.
- Receipts and expenses from business-related travel, such as traveling to a business conference.
After you gather all of your tax documents, you need to organize them.
Throwing them all in a pile is usually not enough unless you want to drive your accountant crazy. It just makes everything easier on everyone to have them organized.
For me, I like to write right on the receipt or document what the expense was for if it is not obvious. I also like to write why the expense was needed for the business so that I do not forget. This is also helpful in case you get audited so that you can easily explain everything and not feel lost because you cannot remember something from years ago.
Do you need a loan in the near future?
For us, one of the things we have been thinking about a lot is how much we should deduct from our taxes. Since we want to buy a house within the next year or two, writing everything off that is an actual business expense is not always a good idea since it can lower your net income that the bank will use in order to qualify you for a mortgage.
In fact, I even contacted a mortgage professional, and even the amount that I put into my SEP retirement account lowers my net income and can hurt me when it comes to getting approved for a home loan because it shows that my net income is lower than it is.
Due to this, you should talk to your accountant about what your options may be. You may have to pay higher income and self employment taxes over the next 1-2 years in order to get approved for a home loan if that is your goal.
If you haven’t yet, the final quarterly payment for your taxes is due on January 15, 2015. However, you do not have to make the payment that is due on this date if you file your 2014 tax return by February 2, 2015. You must pay the whole balance due with your return on this date as well if you choose this option.
If you are new to the self-employment world, then I really hope you have been saving for and paying your quarterly taxes because income and self employment taxes can be a doozy.
What tax tips for self employed workers do you have to share?
Self-Employed Tax Questions: What Tax Forms Are Needed For the Self-Employed?
Are you self-employed and need to know what tax forms you must file on your income tax return? Read on to find out.
By “self-employed”, I am referring to a person who is compensated for selling goods and/or services as an independent contractor or freelancer. I am not referring to an employee who receives a Form W-2 at the end of the year from his/her employer.
Another common term used for the self-employed person is “sole proprietor”. And since you are a sole proprietor, there are specific tax forms that you must include as part of your personal income tax return. Here they are:
Schedule C. Profit or Loss From Business (Sole Proprietorship).
This is where you begin. This form is used to report income received (aka “sales” or “revenue”) and expenses incurred (aka “business deductions”) in the course of operating your small business or self-employment activity. There is also a scaled down version of Schedule C for very small businesses – it’s called Schedule C-EZ.
Form Schedule SE. Self-Employment Tax.
This is used to calculate the self-employment tax, which is your version of the Social Security and Medicare taxes paid by employees.
Form 4562. Depreciation and Amortization.
This is for reporting depreciation expense, the Section 179 deduction, and amortization expense. These expenses are related to the purchase of business assets such as office equipment and furniture, machinery, vehicles, buildings and intangible assets such as goodwill.
Form 8829. Expenses for Business Use of Your Home.
This is for calculating the infamous home office deduction. Many self-employed people have been reluctant to take this deduction for fear that it increases the odds of an IRS audit. I say if you can take it, take it!
Form 1040-ES. Estimated Tax for Individuals.
This is not actually part of your Form 1040, but you will use this form to make quarterly estimated tax payments during the year (assuming your business is profitable). Since our tax system is based on the concept of “pay as you go”, you should not wait until the end of the year to pay your income tax and/or self-employment tax all at once.
There are other forms that may be required, depending on your particular situation. But this list is enough to get you started, as these are the most commonly used forms for the typical self-employed person. Many dollar amounts are transferred from one form to another, and many of these forms are not for the numerically challenged. So while it is certainly wise to familiarize yourself with these forms, it is probably best to obtain professional help if you’re just starting out and want to make sure that your income tax return is prepared correctly.
Many freelancers and small business owners simply outsource their taxes to an accountant. But when it comes to taxes for the self-employed, a DIY approach can have exponential benefits.
Then again, perhaps I’m biased. In doing my own taxes, I’ve learned how to keep better records and how to maximize methods to reduce the amount of taxes I pay. And it’s not as hard as you might think. Whether you’re a freelancer, small business owner, or just earned a little extra income on the side this year, follow these tips to master your own taxes.
Estimated Taxes Are Your Friend. Maybe Your Best Friend.
Nobody wants to end up with a tax bill on April 15th, and for freelancers the best way to avoid this is to pay estimated taxes throughout the year. Estimated taxes are (generally) required, but the IRS makes it easy–I promise. And by getting into this habit as soon as possible, you’ll be forced to review your revenue and expenses on a regular basis. Analyzing your profit regularly can have a positive impact on your bottom line–and help you make more money than you might have otherwise.
You can pay your estimated taxes online through the EFTPS website. There are a few different ways to calculate your estimated tax payments, but the easiest way is simply to pay 100% of last year’s tax bill. To figure this out:
- Find a copy of your 1040 from last year and scan down to line 61. This number is the total amount of tax you owed last year.
- Divide that number by 4.
- Pay that amount (online via the EFTPS website) on each of the estimated tax filing deadlines. Set calendar alerts to remind yourself so you don’t miss a payment.В (For 2013 that would be: 4/15/2013, 6/17/2013, 9/16/2013 and 1/15/2014.)
If your income this year has increased or decreased significantly from last year, then you’ll want to spend some time calculating a more accurate estimated quarterly tax payment.
Don’t forget to pay your state (and city if applicable) estimated taxes as well. Do a quick google search to find your state’s online payment site, and use the same formula as above to calculate your estimated state/city tax payments. (Side note: if you’re a freelancer who works from home and are sick of paying state income taxes, consider moving to one of these no-income tax states instead.)
Every self-employed person knows that the key to reducing taxes is to deduct as many expenses as possible. And the key to deducting as many expenses as possible is to keep track of them during the year. So many online tools exist to simplify this process, that you simply have no excuse but to take advantage. That said, I really don’t think you need to pay for fancy accounting software, particularly if you’re operating a fairly simple one-person business. Here’s how I manage my own business expenses:
- Have a separate checking account and credit card for your business expenses. I use the Amex Simply Cash Business credit card for every single business-related expense I have. I never–never–use it for personal expenses. This is the easiest way to keep track of and maximize your business expenses (tax deductions) throughout the year. For the record, I also have a free business checking account through Banco Popular.
- Link your business accounts to a (free) service like Outright to categorize your business expenses on a regular basis, rather than trying to sort through a huge stack of receipts the day before your taxes are due.
If you’re a freelancer, consultant or any other type of “sole-proprietor,” filing your taxes is fairly straightforward. Just gather yourВ business records for the year (or login to your OutrightВ account), set aside a few hours to follow the prompts using TurboTax or whichever online tax software you prefer, and force yourself to complete the task. It’s really not that hard. Don’t get intimidated by the complexities of the tax code–most of it probably doesn’t apply to you. If you follow directions and double check your work, you will be fine. And if you’ve paid your estimated taxes throughout the year, then you may even end up with a refund. At the very least, if you owe taxes, it shouldn’t be too much of a surprise.
If this is your first year filing taxes as a self-employed person, it might be a bit more painful. But power through, and pay attention. Simply filing your taxes can help you understand how to keep better records moving forward, so that the process just gets easier and easier.
If you end up with a tax bill you can’t afford, please do yourself a favor. Do not, under any circumstances, pay taxes with your credit card. Even if it is your business credit card.
The IRS offers far more reasonable interest rates than the average credit card company. You will be far better off financially if you set up an installment plan with the IRS, than if you pay the lump sum with your credit card and start accruing interest on the balance. The IRS is really not as mean and scary as they may seem. Don’t be afraid to call someone and try to get a bit of help if you need it.
As you earn money in the new tax year, make sure to set aside a chunk of it for your estimated tax payments so you don’t end up owing the IRS again. If you’re overwhelmed and/or confused, start by setting aside 30-40% of your revenue for taxes. Then, seek professional guidance to adjust that amount and calculate accurate estimated tax payments to get back on track. Many local small business associations have CPAs who volunteer time to answer questions for self-employed individuals, so you might even be able to get help for free.
Limited Liability Entities (S-corp, LLC, etc)
If you’ve formed a partnership or incorporated your business, you’ll have a few extra steps when it comes time to file your taxes. The good news is online services like TurboTax, H&R Block and TaxAct still make it pretty simple with their easy to follow prompts. And your tax deductions are more or less the same as sole proprietors. Though the price for online tax filing software is more expensive than the sole-proprietor versions, the cost is still significantly less than what you would pay an accountant.
Oddly, the online tax services seem to think that all S-corp business owners are PC-users. Translation: if you are a Mac user, like I am, and your business is set up as an S-corp, you won’t be able to use the mainstream tax software. If you still want to persevere with the DIY-approach to your taxes, try downloading the TaxSoftware.com iPad app. It’s definitely not flashy, but it worked just fine for me.
Keep in mind that the IRS expects a bit more from you, both in filing your annual taxes as well as your quarterly requirements. Navigating the complex world of small business taxes can seem overwhelming, but with a little bit of effort up front you can still maintain control over your tax situation yourself. Keep track of all of updated deadlines and to-do lists by bookmarking this website:В Small Business Taxes & Management. Another less than flashy tool, the site has every tax detail a business owner could possibly need.
If you’re still scratching your head when it comes to taxes, you can always send me an email. Self-employed individuals stand to gain quite a bit from creating a comprehensive financial plan–both for business and personal finances. Taking the guess work (and the stress) out of earning and managing money allows more time and energy for the things that truly matter–like growing your business. Or perhaps even better, taking a much-needed vacation.
12 Common Questions and Answers About Self-Employed Tax Deductions
Taxes can be confusing, especially for self-employed professionals. Here are a dozen common questions about self-employed tax deductions to help you get a grip on your finances.
1. I’m Newly Self-Employed. What Can I Deduct?
According to the IRS, those who are self-employed can deduct “ordinary and necessary” expenses. An ordinary expense is something that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your job. To deduct, the expense must meet both standards.
Auto expenses are tax-deductible for “ordinary and necessary” business use. Keep track of mileage and expenses (e.g. maintenance, repairs, etc.), and categorize them based on business or personal use.
If you use your car for both personal and business purposes, determine the ratio. For example, if 40% of your mileage for the year is business-related, you can deduct this, as well as 40% of maintenance costs.
Check out our guides to 1099 taxes for Lyft and Uber drivers.
3. I Work Out of My House. Can I Deduct Things Like Internet and Phone Bills?
To the extent you use the internet for your business, yes, you can deduct these expenses up to the percentage that is business-related. The same is true for your phone. Your business use is deductible; the personal use is not.
This gets a bit trickier. If you work from home, part of your utility bills are deductible. The amount you can deduct, however, is calculated based on the percentage of your home that is used for business. The business use of your home is deductible, and aptly known as the home office deduction. See item 10 for more information.
5. What Marketing and Advertising Expenses Are Deductible?
Any legitimate marketing you do is a deductible business expense. This includes everything from pay-per-click advertising and website promotion, to video production and business cards.
6. If I Do Some Business While on a Family Trip, Is the Trip Deductible?
Wouldn’t this be nice? But, no. Given the answers above, it should not surprise you to learn only the portion of the trip that is business-related is deductible, and only for you, not your family. Keep this mind during your next holiday outing.
7. What Are Some Other Common Self-Employed Business Deductions?
You can deduct office supplies, legal and accounting expenses, the cost of hiring freelancers and contractors, computers and other equipment, professional licenses, association dues, periodical subscriptions, rent, cost of repairs and upgrades, and so on. Any money you spend to run your business is generally deductible.
8. What About Meals and Entertainment?
You can deduct 50% of business-related meals and entertainment expenses. These can be meals you have as part of business travel or those you pay for as part of a business meeting.
9. Are There Special Rules for Health Insurance?
In short, yes. Because of the nuances of health insurance, this is a case where you may need to speak with a tax specialist. The general rule is those who are self-employed can deduct the cost of their health insurance premiums, as well as those of their family.
10. What Is the Home Office Deduction?
If you run your business out of your home, you can deduct associated business costs for things like mortgage interest, insurance, home repairs and depreciation.
But before you claim it, you must decide whether to do so using the simplified method or the regular method. The simplified method bases your deduction on a flat rate per square foot. An example of the regular method, which is more involved, is as follows: If you have a 1,000 square-foot home where you use a 150 square-foot room for business, 15% of your utility bills would be deductible.
11. Won’t I Get Audited If I Take the Home Office Deduction?
The deduction does not increase your odds of an audit, but you should always be sure to calculate the deduction correctly. The IRS says you can claim the home office deduction if:
You use that part of the home regularly and exclusively for the business, and
Your home office is either the principal location of your business or a location where you regularly meet with customers or clients.
Meeting these two conditions will help you avoid any audit-worthy behavior.
12. Do I Need to Keep Receipts to Claim Deductions?
Documentation is always helpful. Keeping receipts isn’t a requirement, though it can help if you’re audited. You can also try accounting software like QuickBooks Self-Employed, which helps track expenses and automatically classifies them as deductions.
Did you know that some of your personal out-of-pocket expenses may also be deductible? Or that someone once tried to deduct carrier pigeons as a business expense—and won? Find out more as part of the Intuit guide to self-employment deductions.
self employed tax questions
If you’ve received a salary your whole working life, you’ve already been paying Social Security and Medicare taxes…aka self employment tax.
It’s just that your employer has done the work of calculating, filing, and paying those taxes on your behalf.
Also, your employer paid half of those taxes for you. Of course, your employer set your salary knowing what those taxes would cost it, so you weren’t getting a free lunch as an employee.
As a self-employed business owner, you are the employer, and are responsible for calculating and paying your self employment taxes.
As a small business owner, you’re still required to pay FICA (Social Security) and Medicare taxes on your income, only now it’s called Self-Employment tax (SE). Now that you’re self-employed, it’s your job to calculate and report your employment taxes.
How a Single Member LLC computes SE (Self-Employment) Tax
As a single member LLC, the IRS treats your LLC for tax purposes as a “disregarded entity”. Don’t worry, all the limited liability aspects of your LLC are intact.
Remember that an LLC where the only members are two married individuals (that is, married to one another!), the LLC can be treated as a single member LLC and thus have disregarded entity status.
Disregarded entity status means is that you don’t file a separate return for your LLC. Instead, you simply report your business income and expenses (all those deductions you’ve been tracking and keeping receipts for) on a Schedule C on your form 1040.
After completing your Schedule C, you’ll then complete a Schedule SE which will calculate your self employment tax.
You pay approximately 13% FICA on the first $100,000 of your LLC’s net income–that is, income after subtracting all your business expenses. In addition to FICA, you’ll pay 2.9% Medicare tax on all your net income. This tax sounds extremely high, and it is.
However, it’s not as unfair to the self-employed as it sounds. All self-employed taxpayers are permitted to take a deduction on their total taxes in an amount that is equal to half of their self employment tax.
Example: Suppose your single member LLC’s business did $70,000 in revenue last year and had $20,000 in expenses. Your net income would be $50,000. You’d owe approximately 15% self employment tax on the $50,000 net business income, or $7,500. In addition, you’d get a deduction on your regular Federal income tax return equal to half your self employment tax, or $3,750.
The purpose of this is to place the self employed in same position with respect to FICA taxes as a corporate owner who paid himself a salary (the double tax for corporations comes in when the corporation pays a dividend to the owners–there’s no corporate double tax on salaries).
How Multi-Member LLCs calculate and pay Self Employment tax
With a multi-member LLC, the IRS does not treat the LLC as a disregarded entity.
Instead, the LLC will file an informational partnership tax return on form 1065. I refer to this return as “informational”, because the LLC will not actually pay any tax as an entity.
Instead, the purpose of the LLC’s tax return on IRS Form 1065 is simply to figure out the total amount of tax owed, and then each partner pays his share of the taxes. So, while each member will have two tax returns, tax is only paid once. From this Form 1065 informational tax return, the LLC will issue K-1s, which tell each member how much profit or loss they will recognize.
Social Security (FICA) tax rate: 12.4%
(note: only the first $100,000 of your self-employment income is subject to FICA)
Medicare tax rate: 2.9%
This article on Self Employment tax for LLCs answers the following questions:
- How do I calculate self-employment tax for my LLC?
- Do I have to pay self-employment tax for an LLC?
- Are single-member LLCs treated differently when it comes to self employment tax?
If you've received a salary your whole working life, you've already been paying Social Security and Medicare taxes. aka self employment…