Being your own boss can feel freeing and powerful, but with great power comes great responsibility, especially when it comes to taxes. Taking care of all business aspects on your own means you should be prepared to handle all the financial work that comes with the new adventure. Here’s a brief tax guide for the self-employed.
Get Financially Organized
There’s nothing worse than scrambling for income and expenses during tax time. Staying organized throughout the year can save you time and money. You’ll want to maintain accurate records including:
- Income statements with invoices, receipts, Forms 1099, etc.
- Purchase invoices
- Receipts for travel, transportation, entertainment, and gifts that are business-related
- A breakdown of your assets, including purchase price, cost of improvements, depreciation deductions, etc.
- Employment tax records
Know Your Responsibilities
We know you are already responsible for the success of your business, but you also need to know your financial responsibilities to maintain your business. This includes paying self-employment taxes and quarterly estimated tax payments. If you earned $400 or more in 2022, you need to pay self-employment taxes. The current rate for self-employment tax is 15.3% of your net earnings, which consists of social security and Medicare tax. The good news is that since in a typical job, the employer is responsible for paying half of this tax, you’ll be able to deduct 50% of your self-employment tax during tax time.
Since you won’t have an employer to withhold tax from your self-employed income, you’ll need to make estimated tax payments by each quarterly deadline:
- April 18, 2023
- June 15, 2023
- September 15, 2023
- January 16, 2024
A good rule of thumb is to make an estimated tax payment if you expect to owe more than $1,000 in federal taxes for the year. If you do not make these payments, you could face underpayment penalties.
Take Advantage of Tax Deductions
As a business owner, you have the benefit of writing off expenses that most employees cannot, as long as they are ordinary and necessary for business operations. You can write off advertising costs, supplies, legal fees, repairs, vehicle expenses, business travel and entertainment, and even more if you operate your business from home. If you aren’t eligible to participate in your spouse’s workplace health plan, you can typically pay for your own health insurance and deduct your premiums. If you have a business loan or business insurance, you can also deduct the loan interest and insurance premiums. If you only take advantage of one deduction as a business owner, you should consider the one for self-employed retirement plan contributions to an SEP-IRA, SIMPLE IRA, or 401(k). These accounts can reduce your tax bill at tax time and help you accrue tax-deferred investments gains in the future. Be sure to look into all tax deductions available so your taxable income is reduced.
Tax Help for the Self-Employed
Running a business, whether small or large, has immense opportunities for financial success. However, all of that hard work and prosperity can be taken away if you do not file your taxes correctly. In the worst-case scenario, owing the IRS taxes and not being able to pay can result in a tax lien, which can shut down your business. If this is your first year as a business owner, start off right by knowing your tax responsibilities. If you’ve had your business a while but need tax help now, Optima Tax Relief can help. Contact us for a free consultation with one of our knowledgeable tax professionals.
Filing taxes when you are self-employed can be very complex. There are plenty of factors involved, from figuring out how much you earned to adding up your business expenses. One of the ways you can better prepare yourself for the filing season is to ensure you have all the correct and relevant tax forms.
Most people will be familiar with Form 1040 since it’s the one that taxpayers submit to report their taxable income. Using your gross income and the credits and deductions you can claim, the form helps calculate the amount of tax you owe or the refund you will receive. Typically, an individual will be required to file Form 1040 if they meet certain gross income thresholds according to their filing status and age. For example, single filers under age 65 are required to file Form 1040 for 2022 if their gross income was at least $12,950. However, self-employed individuals follow different filing requirements. If you are self-employed and have net earnings of at least $400, you must file an income tax return.
A Schedule C, also known as a Business Profit and Loss Form, helps anyone with self-employed income report their gross business income and expenses. Self-employed income is basically all sources of income that do not come from a W-2. Income from your small business, gig work, or side hustles should be reported with a Schedule C, typically one form for every individual business activity you are involved in, unless they fall into the same category. For example, if you have an Etsy shop and deliver for both Uber Eats and DoorDash, you’ll likely fill out two Schedule C forms, one for your Etsy shop and one for both driving services.
While most of the categories on Schedule C are self-explanatory, some can be quite difficult to calculate. You probably received at least one 1099 if you collected payment for your self-employed work. You can use these to add up your income. You’ll be able to deduct any returns or refunds given during the year, auto expenses if you use your vehicle for business use, and the cost of goods sold. Calculating your expenses can be the trickiest part of filing for self-employed taxpayers, so it’s probably best to discuss this with a qualified tax preparer.
Form 4562 is used to depreciate or amortize your business assets. This can include buildings, machinery, equipment, vehicles, and patents. You may not depreciate land. Taxpayers must file a separate Form 4562 for each depreciation or amortization deduction being claimed.
If you plan to deduct your home office expenses, you’ll need to file Form 8829, Expenses for Business Use of Your Home. Remember you can only claim the home office deduction for areas in your home used exclusively for business and if it is your principal place of business. Typical deductions include insurance, rent, utilities, repairs and maintenance, home depreciation, deductible mortgage interest. However, you may only deduct the portion that is used for business use only. For example, if you use 15% of your home’s square footage exclusively for business use, you may deduct 15% of your home expenses for a business deduction.
Schedule SE is used to calculate your self-employment taxes to determine your Social Security benefits. You’ll only need to file a single Schedule SE, even if you have multiple businesses. You would simply combine your net earnings on a single form. However, married couples filing jointly who both earn self-employed income should file separate Schedule SE forms.
Tax Relief for Self-Employed Individuals
Filing taxes when self-employed can be very complicated, especially if done on your own. Because there are several business expenses that can be exaggerated, the IRS typically takes a closer look at deductions claimed by self-employed individuals, leading to more audits. It may be best to seek the help of a credible tax preparer or professional to look at your tax situation. Give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.