Written for EO by Jessica Thiefels, social media coach and organic marketing consultant.
Entrepreneur’s Organization is a global network of over 13,000 business owners. Learn how EO Chicago helps over 150 business owners grow.
According to Pew Research, close to 15 million Americans are self-employed. Filing your taxes when you’re self-employed means you’re having to deal with a range of new tax rules and regulations that you’ve never dealt with for personal taxes.
To ensure you understand what you have to do, consider turning to a CPA. This person will walk you through what you should and shouldn’t do. You’ll likely see your CPA a few times throughout the year as well to make sure your income is on track and that there are no surprises come tax time.
Even if have an expert to guide you, it’s important to know what’s expected of you for taxes as a self-employed person. Here are just some of the tax rules that may be new to you and are important to know.
If you’ve paid out more than US$600 to a service provider or received more than US$600 for providing services, you’ll give and get 1099-MISC for each business or person. As someone who’s self-employed, you’ll need to send a 1099 to anyone who you’ve paid more than US$600—think, a freelance writer or web designer. If you use accounting software like Quickbooks, you can do this automatically once you have a W-9 from the person. The companies who owe you a 1099 will send it automatically—there’s no need for you to request it.
Note that you must have the 1099s sent out by January 31, according to Micah Fraim’s Freelance Tax Guide, so put it on your calendar to avoid a penalty.
Quarterly Tax Payments
Quarterly tax payments are paid by self-employed individuals who plan to earn more than $1,000 in the tax year. The IRS requires you to pay taxes as you earn income throughout the year and when you work for a company, the amount of money withheld from your paycheck covers this. As a self-employed individual however, you have to make quarterly tax payments to cover these taxes throughout the year yourself.
It’s important that you pay enough quarterly taxes and that each payment is made on time. The IRS explains, “If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.”
This is another reason why it’s important to work with a financial professional or CPA. They will ensure that you know exact payment dates along with the correct estimated totals.
Keep a receipt for anything that you buy for your business, from stamps for mailing checks to your invoicing software and passes to industry conferences. These expenses are deductible and reduce the overall total dollar amount that you owe taxes on. According to the same tax guide from Micah Fraim, some of the common tax deductions are:
- Office supplies and equipment
- Travel and meals
- Health insurance premiums
- Professional development
- Bank fees
- Software costs
Keep track of each expense so they can be factored into your taxes at the end of the year. There are a variety of apps you can use for this, and most accounting software allows you to do it as well.
Home Office Deduction
If you’re a contractor or freelancer, there’s a good chance you work from a home office. If you have an office area designated as a working space, you’re allowed to deduct a percentage of the cost of that space, as well as a percentage of utilities used.
Amy Bergen, writer for Money Under 30, explains: “The home office also needs to be the principal or primary place of your business—your base. If you occasionally work or have meetings elsewhere, you can take the deduction as long as you use the home office consistently.”
There are a few methods for taking advantage of this deduction. Work with your financial advisor to choose the best one for you.
This tax covers your contribution to Medicare and Social Security as a self-employed individual. This is normally taken out of your paycheck, but since you’re no longer a W-2 employee, you’re now responsible for this yourself. As such, this cost is factored into your quarterly tax payments.
“When you’re self-employed, you are paid the full amount you earn. Nothing is deducted from your check for Social Security and Medicare taxes. Instead, you make estimated tax payments during the year to pay your SE tax and your income tax. If you don’t make estimated tax payments, then you pay these taxes when you file your return.”
The tax rate for the self-employment tax is 15.3 percent, with 12.4 percent for Social Security and 2.9 percent for Medicare.
Know Your Tax Obligations
It’s important that you know your tax obligations as a self-employed individual to avoid fees or penalties. Working with a financial professional ensures that you’re not missing important payments and are totally prepared come tax season. Get familiar with your responsibilities as you step into the world of self-employment to start your tax year on the right foot.
Source: EO Global Octane Blog