If you’re a W2 employee, taxes are so much easier than for the self-employed. Your employer withholds federal and state income taxes, Medicare premiums, and Social Security payments — and pays a portion of the latter two as well. Your taxes can get complicated if you have a ton of investments and other special circumstances, but a lot of the heavy lifting has already been done for you.
That’s not true for those who work for themselves. If you’re self-employed, nobody is withholding taxes for you and you’re footing the full bill for Medicare and Social Security if you make more than $400. Called the “self-employment tax,” that can be a chunk of change — 15.3% of your net earnings in total, split between 12.4% for Social Security and 2.9% for Medicare. As if that weren’t enough, your net earnings (minus the employer-equivalent portion of your self-employment tax) are counted as personal income for which you need to pay income tax.
At the same time, you have a wealth of business-related expenses that can significantly decrease the amount of money you have to pay. These expenses are deducted from your gross earnings to arrive at the net income that’s used to calculate your self-employment tax and eventually your income tax.
In this guide, we’ll go over some steps you can take to make the process of filing your self-employed taxes a little easier. None of this is meant to be tax advice — make sure to consult with your accountant or tax preparer for the details — but it might be helpful in preparing for April 15.
Keep detailed records
This one should be obvious. You’ll want to make sure that you maintain a record of all your financial information, from the money you make (typically reported on IRS form 1099 if you make more than $600 for a given client) to your business expenses. Depending on the size and complexity of your business, you may do this manually or you might invest in an accounting application like Quickbooks.
Here are some of the things you’ll want to keep track of:
- All your earnings, from all sources — whether or not you receive a form 1099
- All your business expenses, which can range from office supplies to marketing investments to self-employed health insurance
- Any home office expenses, including things like rent or mortgage payments, property taxes, utilities, and repairs to either your office or the home itself
- Educational costs related to your work
- Self-employed retirement plans
- Large investments that depreciate over time, like vehicles
This list isn’t meant to be exhaustive of all the things that you’ll want to track — the IRS has a list of the kinds of things that you can deduct. Check out that list to make sure you’re including everything that qualifies as a legitimate business expense. Finally, make sure you keep accurate written records as well, such as receipts, invoices, and check stubs.
Pay estimate taxes
Since you don’t have an employer withholding your taxes for you and sending them to the IRS (or their best estimate of what you’ll owe), you’ll need to handle this yourself. The first step is to make sure you’re keeping track of your earnings and estimating your business deductions as you go along. That way, you’ll have an idea of what your net earnings will be for the year and how much you’ll owe in both self-employment tax and income tax.
Once you’ve calculated these numbers, you’ll want to make quarterly estimated tax payments directly to the IRS. You can do this by sending in a check or by paying through the IRS online system. Estimated tax payments for the current tax year are due in the middle of April, June, September, and January. If you don’t pay enough in your estimated tax payments, then you could end up owing a penalty and interest.
Select the right tax software
If your situation isn’t too complicated, then you might be able to file your business taxes yourself. If so, then you’ll want to make sure that you choose the business version of your preferred tax software. These versions will walk you through all the business deductions that might apply to you, including the highly complex category of the home office — which can be one of your most valuable business write-offs. The software will also make sure that the right amount of money is passed over to the personal income tax section of your tax return.
Two good choices include H&R Block’s line of products, which can handle most kinds of small businesses including sole proprietorships and independent contractors. Another excellent choice is Intuit’s Turbotax for Business, which walks you through the complexities of filing your business taxes and helps you maximize your deductions and thus minimize your self-employment and income taxes.
Whichever software you choose, you’ll want to make sure that you’re feeding it the right information. Garbage in, garbage out, as they say. Both companies also help in filling out your taxes, both online and in real time, answering questions and helping you understand the complexities of business tax filings.
Plan for the future
Self-employed individuals have access to many of the same retirement investments as “regular” employees, including 401(k) plans and individual retirement accounts (IRAs). You’ll want to make the same investment in your retirement as you would if an employer were guiding you, and note that these investments can be business deductions as well. Given the complexity of the topic, though, we’ll skip the details here and direct you to an investment firm or accountant to learn more.
You’ll also want to think about any investments that might help your business grow. Is your PC too slow, for example? Then buy a new one and write it off. Is your home office too small? Then expand it and write that off as well. Remember that everything you spend on making your business run can be a business expense that will reduce the amount you’ll pay to Uncle Sam every year.
Running your own business can be complicated enough, and preparing and filing your taxes just makes matters worse. But the more prepared you are, and the better your tools, the easier things will be when April rolls around.