Almost 11% of American workers are self-employed. Many are turning to self-employment because they want more freedom, flexibility, and money.
There are a few things that you should know about before you make the leap to join the millions of self-employed workers. Do you know about the self-employed tax? Do you know how to file self-employment taxes? Don’t get stressed because this is part of the learning process. Start by reading this article to learn about the self-employment tax and other tax tips to help you be prepared for tax season.
Know What Documents you Need to File Taxes
There are a lot of documents that you need to get together before you file taxes. Figure out which filing forms you need.
In the vast majority of cases, you’ll file taxes using Form 1040 and Schedule C. There may be additional forms if you claim tax credits. If you are a self-employed contract worker, you should get a 1099 form from the place where you do business. Get together any documents to add up your business income.
Make sure you have other documentation for your business expenses, such as receipts and invoices. Since you file your personal and business taxes together, get your personal deduction forms together.
For instance, if you paid mortgage interest, you’ll have Form 1098 from your lender. Be sure not to throw these things away after tax season. The IRS recommends that taxpayers maintain records for about six years. It’s possible that you face an audit or have to amend your taxes. Maintaining these records will help you down the road.
Keep Track of Taxes All Year Long
Do you spend hours getting your stuff together to file taxes? The best thing to do is to have a system in place so you track your income and expenses all year long. Software suites for self-employed people help you track your income and expenses. You can just bring up a report that tells you what you spent in a certain expense category.
The key to make this system work is how you set up your chart of accounts. This is the system that categorizes income and expenses. Make sure that you set yours up to reflect the income sources and expenses of your business. Reconcile these accounts every month to ensure accuracy.
Get Tax Help
There is a lot that you don’t know about taxes. Doing self-employed taxes on your own isn’t recommended. You could end up in a situation where you get behind on your taxes or make an expensive error.
The reason why most self-employed people avoid working with a CPA is the expense. Some charge close to $400 to file taxes. They also charge according to the type of forms filed. You might need additional forms to file your taxes, costing you more money. Fortunately, there are services like www.taxfyle.com/small-business-tax-filing, QuickBooks, and Paro. These are services that give you access to a CPA without the cost.
Take Self-Employment Tax Deductions
The great thing about being self-employed is that you get to take business deductions to lower the amount of taxes you owe. You pay taxes on the net profit of your business, not the gross revenue. The more expenses you can claim, the better. Of course, these have to be business-related.
You need to have receipts for the expenses. Your bank statements aren’t considered documentation of the expense. If you work from home, you may be eligible for the home business deduction. This lets you deduct a percentage of your mortgage or rent payment and utility expenses. The space where you work has to be used exclusively for business. It can’t be a room that you use as a playroom or living area.
Pay Estimated Taxes
Estimated taxes are required if you expect to pay more than $1,000 in taxes for the year. You might be able to get away with this during your first year, but expect a huge tax bill in return.
You may get hit with penalties and interest because you didn’t pay estimated taxes. Your first tax bill is a little scary because you don’t fully understand your tax obligations as a self-employed person. It’s hard to figure out finances, and they don’t think about taxes until the bill is due.
Then you stress out about paying a huge bill all at once. Put a system in place where you set aside a percentage of your income and place it in a separate account. Do this every time you get paid. This ensures you’re prepared to pay your tax bill without stress.
Don’t Forget About State and Local Taxes
You’re prepared to pay for federal taxes, but you’re not quite done. You may have to pay state and local taxes, depending on where you live.
States like Oregon, Texas, and Florida don’t have income taxes. Pennsylvania has a 3.07% flat tax rate and you need to pay an additional 1% earned income tax. Check with your tax expert to find out what your state tax obligations are. These may vary by industry as well. For instance, if you have an ecommerce business, you’ll need to pay sales tax.
Tax Planning for Next Year
After your taxes get filed, you should start thinking about next year’s tax return. Review your tax return with your tax professional and find creative ways to reduce your tax liability. For instance, you can open an IRA or other retirement account to lower your liability. You can get more strategic about purchasing equipment and courses to help you grow your business.
Filing Self-Employed Tax
Taxes are complicated for everyone. They’re even more complex for self-employed people because you have income from different sources and self-employed tax deductions.