Being self-employed provides certain freedoms, but if you’re not ready for tax time, you’ll be questioning whether they’re worth it or not.
But what does it mean to be self-employed and how do you know if you are? The Balance Small Business defines self-employed: “Someone who is self-employed is the owner of a business, an individual who earns a living by working for himself/herself and not as an employee of someone else.”
They further refine that to include anyone who owns a business:
- As a sole proprietorship
- As a partner in a partnership
- As a member (owner) of a limited liability company (LLC)
If you’re running an independent retail shop or online store, you’re considered self-employed, which means tax time is a little different for you. Not only should you already be keeping financial records of all of your income and expenses, and paying taxes on a quarterly basis, but you should know what you can deduct, who can help you, and what mistakes to avoid, so you don’t get slapped with costly fees.
Confused? Don’t worry. Here’s what you need to know as a self-employed individual when tax time approaches.
You’re Working With a CPA
With the plethora of tax prep software out there it can be tempting to do your taxes alone, especially if you use one of the many programs that have a specific product for small business owners. Doing it yourself, while seemingly easier or more cost-effective, may not actually be your best bet. Fundera gives a great example of why:
“Sometimes businesses have to work with filing taxes for multiple states, especially if their sales are through the Internet. And the interest from a short-term debt needs to be written off properly, or else you might have trouble securing a loan in the future … Figuring out which expenses are tax-deductible—your car? Your rent?—can also be tricky to do without professional help.”
For those of you selling products online, start by reading through this extensive sales tax guide from NOLO to get an idea of how complicated taxes can be for your industry.
The key takeaway here, especially if you’re new to self-employment, is that you don’t know what you don’t know. As a new business owner, you assume your tax situation is far simpler than it really is because you don’t know any better. Unfortunately, that excuse won’t fly with the IRS, so the best way to file taxes properly and avoid any penalties is to work with a CPA or other tax professional.
Ultimately, a certified accountant or CPA will be able to file your taxes and advise you on steps you should take to minimize your tax liability. A good CPA will also want to meet more than once a year—likely 2 or 3 times—to make sure everything is on track and you’re not surprised come tax time.
You’re Combing Through Meticulous Records
As a business owner, record-keeping is imperative. Any time you purchase something for your business you should keep your receipt and record the purchase, whether you use a program, expense tracker or spreadsheet.
When it’s time to make your deductions, you’ll have all the totals so your accountant can quickly input the expenses. Don’t save this until the last minute, or you’ll be spending hours going back through the year—time that you don’t have to waste as a business owner.
If you’re new to tracking your income and expenses, start with QuickBooks’ guide: Accounting 101 for Small Businesses. The second chapter discusses tracking and categorizing your expenses, from travel to your new laptop. The benefits of doing so span well past tax time:
- Monitor the growth of your business
- Easily build financial statements
- Track deductible expenses
- Support what you report on your taxes
Don’t forget that all income should be recorded and ready to share with your accountant as well. There are dozens of free accounting tools you can use to track income, in addition to expenses, so it’s all in one place when you need it.
You’re Prepping Your Deductions
Being self-employed means that you qualify for a wide range of deductions that are not available to the average taxpayer. Below is a brief list of the most common deductions available to self-employed business owners:
- Equipment: Computer, printer, cell phone, office furniture, and even technology like a point of sale system.
- Travel: Expenses, meals, and mileage.
- Home office: A portion of your rent or mortgage, and home utility expenses, including cable
- Business loans: Interest paid on business loans. Note that, as of this year, you can only deduct up to 30 percent of your business’ earnings before interest, taxes, depreciation, and amortization, according to The Business Tax Guide for 2018.
- Publications or subscriptions: Trade magazines/websites, or professional associations related to your business.
- Education: Conferences, books, classes, etc.
One deduction you may not know about is health insurance—which is also likely one of your most significant monthly expenses. You can deduct what you paid in health insurance over the year, but there are some stipulations, according to experts at Health Markets. Those include:
- You must have a profitable business—you have to earn something within the given year, and the deduction can only amount to what you ’ve earned within the year.
- You can’t combine multiple businesses to qualify. You have to connect the deduction with one specific business.
- You can’t have any other health coverage. If you’re on someone else’s plan, that doesn’t count toward this deduction
Note that not all of these deductions are available to every self-employed individual, which is why it’s important to work with a CPA. They’ll know what’s available to you and what’s not, so you don’t spend hours digging through tax law updates or misreporting something accidentally.
You’re Getting Self-Employment Taxes In Order
In addition to income taxes, if you’re self-employed, you have to pay self-employment taxes. This is in lieu of the taxes your employer would pay for you at the end of the year. Since you work for yourself, you’re now responsible for them, and these are broken down into Social Security and Medicare tax.
The IRS explains: “The self-employment tax rate is 15.3 percent. The rate consists of two parts: 12.4 percent for social security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance).”
The first $128,400 of your combined wages, tips and earnings are subject to any combination of the self-employed tax. Generally, if you earned more than $400 within the year from self-employment, you must pay this tax.
Ultimately, the amount that you pay is based on your business income, so lowering your income through deductions will reduce the amount of self-employment taxes you have to pay come tax season. Knowing how much you’ll owe for these taxes come tax time ensures that you’re not surprised with a large payment that you haven’t financially prepared for.
Get Ready for Taxes
There are so many benefits, tax-related and otherwise, that come from being self-employed. Work with a CPA to get your self-employment tax right and ensure that you’re not missing any essential deductions, and don’t forget to do your part as well. Keep track of expenses and income and keep all your numbers organized so, come tax time, you’re not scrambling around at the last minute. When the time comes to file, you’ll be glad you were ready and can get back to doing what you love: running your business.