For self-employed individuals, there are a lot more steps involved when it comes to taxes than for most people. Here are some tips to help you keep as much of your hard-earned money as you can.
Are you self-employed?
The IRS considers you self-employed if you work as an independent contractor for a business or you have a business classified as a sole proprietorship. If you work for somebody, you likely receive a 1099 MISC form from businesses at the end of the year.
Members in partnerships that run a trade or business are also considered self-employed. If you own your own business, either full or part-time, you are self-employed. One of the primary indicators that you're self-employed is that taxes are not automatically taken out of your earnings.
Tip #1: Keep detailed records
For most of these tax deductions to work, it's important to keep accurate records. This includes receipts, logs of time spent working, and phone records. It also includes keeping track of the miles you drive for work in your car and anything you buy personally that's actually for business use.
Many of these items are taken care of with a single piece of accounting software. Even if a CPA or tax preparer does your taxes, having an accounting program will make everything easier. Many even let you share your accounts with your bookkeeper. Regardless of how you do it, be sure to keep your books up-to-date and organized - it will save you a lot of time and grief at tax time.
Tip #2: Put aside the money you'll need to pay your taxes
In 2019, the self-employment tax rate was 15.3 percent: 12.4 percent for social security, and 2.9 percent for Medicare. That means that you will owe 15.3 percent in taxes for all the money you bring in when you're self-employed. If you expect to owe more than $1000 in a tax year, you're required to pay estimated quarterly taxes toward your annual taxes. This means that if you've made more than $6535.94 in net earnings in your business, you will be required to pay estimated quarterly taxes.
To calculate how much they'll be, you can use the IRS Form 1040-ES. To make sure you're able to pay your taxes each quarter, it's important to put money away throughout the year so you can write the check when the due date comes around. The best way to do this is to immediately siphon off at least 15.3 percent of your earnings as they come in and put it in a specific account for that tax payment.
Tip #3: If you use it for business, it's probably deductible
Self-employed taxes can include a number of deductions:
- Entertainment and gifts for clients
- Fifty percent of the costs of meals when you're traveling
- Membership fees for business-related publications
- The portions of your Internet and phone bills that coincide with business use
- Travel, including bus fares, parking fees, plane tickets, and train tickets
- Car expenses related to either the miles you've driven for work purposes or a percentage of the actual costs of travel in proportion to business use of your car
- Your health insurance, if you bought it for yourself
- Your home office, if it's a separate room in your house and used solely for business purposes
You can reduce your tax burden and make tax time less stressful when you're self-employed. With some advanced planning and organization, you'll be able to take advantage of the deductions available, keeping more of the money you earned in your pocket.
