Self-employment is an enjoyable, stressful, and lucrative way to make money in 2019. However, you will find your taxes to be more complex than W2 workers. It’s easy to get audited, there are a ton of deductions available, and you can file your taxes online for free if you choose.
Filing your own taxes as a self-employed individual can be scary and stressful for the first time, however, these tips will make filing your taxes a little easier.
Keep Track of Everything
The most important tip is to track everything. How are you going to know what you can deduct if you don’t know what you spent in the first place?
Newer entrepreneurs often make the mistake of failing to track their expenses. You might get away with it, but if you get audited and you don’t have the paperwork to back up your expenses, you’re in trouble. It could lead to heavy fines from the IRS and a greater likelihood that you’ll get audited again in future.
Below we’ll discuss some of the main things you want to make sure you’re keeping track of.
All Money You’re Paid
When you receive cash for your services, or you don’t receive a 1099 it’s tempting to not claim it on your taxes.
Even if you are paid in cash or you don’t have an 1099 from a client, they’re still going to count your payment as a business expense.
It’s very important to make sure that you’re including all income received on your taxes.
All Business Expenses
Keeping track of your business expenses is relatively easy. You can use an app or keep track of your business expenses with a simple spreadsheet.
Things you might overlook include:
- Canva subscriptions.
- CopyScape payments.
- Payments to your email marketing platform, such as MailChimp.
- Equipment you purchased such as a lightbox.
Another type of income you may forget is stuff you get for free.
If you’ve ever accepted gift cards or a physical product in exchange for your services, you must report the amount of the item as income.
For example, you may run a product review blog where companies send you products to review on your site. If you’re not donating the products to charity, you’re going to be on the hook for taxes, as the company will be claiming your review products as an expense on their taxes.
The same goes for the gift cards that you may receive from online focus groups.
Use Software to File Your Taxes
Your first-year self-employed you may feel as though you need to hire an accountant or go to a tax provider to make sure your taxes are correct.
I highly recommend against both.
Instead, use software to file your taxes and save that money since more than likely you’re going to have to pay money towards your taxes already.
Here are some examples of great tax filing options that are simple to use and involve no hassle.
Turbo Tax is perhaps the biggest name in online tax preparation platforms. For just $79.99 for simple tax affairs, you can plug in all your tax data and have it sent to the IRS the moment they start accepting submissions.
All you must do is answer the simple questions asked by Turbo Tax. They’ll fill in all the tax forms you need and help you take the maximum amount of deductions.
Pros of Turbo Tax
- Simplicity – You’ll find few major tax offerings that are as simple as this to use.
- Valuable – The ItsDeductible tool will enable you to figure out what you can deduct and what you can’t. You’ll never have to worry about leaving money on the table.
- Save Information and Import – You can import previous tax returns from QuickBooks and save any tax returns you file via Turbo Tax, so filing will be even easier next year.
E-File.com is an excellent option if you have an extremely simple tax situation. This is really the bare bones option for people who need to file both state and federal tax returns. It’s one of the most affordable options around.
Just remember that the one downside is that they don’t offer phone support. You’ll either must contact the IRS or send E-File an email if you experience any problems with your tax return.
Pros of E-File
- Knowledge Base – E-File.com offers an entire knowledge base for finding the answers to your questions.
- Great Pricing Tiers – You’ll be able to choose from different pricing tiers, so you never have to pay for features you have no use for.
Cons of E-File
- No Support Staff – Outside of tax season, E-File.com is no help. The only way to get help is to send an email.
Credit Karma is the perfect alternative to Turbo Tax for those who need to use a variety of IRS forms and schedules. They’re perfect when it comes to customer service. Their live chat system is a great resource if you’re trying to figure out tax preparation software for the first time.
I was someone who used to use Turbo Tax, however, since Credit Karma introduced their free tax filing software, I’ve made the switch.
Pros of Credit Karma
- Free – The best part about Credit Karma is it’s free.
- Contains Most Forms and Schedules – For most people, they’ll have all the state and federal tax forms they need.
- Great Support – With live chat and phone support, Credit Karma supports you all the way.
File Even if You Didn’t Receive Form 1099-Misc
Did you know that if you earned less than $600 for a client, they don’t have to send you a Form 1099-Misc?
A lot of people don’t know this. Self-employed individuals may perform a lot of smaller projects for smaller clients. Plus, there’s a good chance you may be working for clients in other countries.
This is why it’s super important to make sure you’re tracking all of your money. You must report everything and if you don’t there’s a good chance the client has reported the expenses paid to you to the IRS already.
Not claiming income can cause you a hefty tax bill when you’re not prepared for it.
Make Your Estimated Tax Payments
Since your taxes aren’t being withheld like employees, you may think it’s okay to just pay what’s due when you file your taxes. Doing this will result in a penalty, which many self-employed people learn the hard way their first year (including myself).
Depending on your self-employment income, these payments may catch you by surprise each quarter. To get ahead of the payments it’s recommended that you save between 25% and 30% of your income to cover your taxes.
Deduct, Deduct, and Deduct
Remember how we talked about keeping track of all your business expenses earlier? Here’s why.
You want to make sure that you take advantage of as many self-employment deductions as you can to lower your tax payments.
Deductions to Take When Self Employed
- Home office expenses. The IRS allows you to take a standard deduction for your home office, which is measured by the square footage of your home office.
- Business travel. Going to a conference or need to fly to visit a client? Then you can claim those expenses back in full if those expenses are necessary for work purposes. Personal leisure doesn’t count. Yes, believe it or not, you can claim for utilities. This is easy if you rent an external office, but at home, it gets more complex. All marketing operations are viable deductions for any business. This includes both online and offline marketing.
- Mileage and gas. You can take mileage deductions for work purposes. The mileage rate changes every year, but right now it’s 58 cents per mile for business purposes.
- Health insurance. A lot of self-employed contractors don’t realize this and choose to go without.
- Contract labor. If you pay for contract labor, you can deduct the expenses from your tax returns come the end of the year. Remember, you’re not obliged to pay them traditional employee benefits.
- Commissions and fees. Do you pay PayPal fees or banking fees? Then they’re are also fully deductible as they’re considered to be an unavoidable business expense.
- Repairs and maintenance. Things happen and sometimes you may need to pay for repairs. Whether your car breaks down or you need a new computer, you’re able to reclaim the cost of repairs.
These are the main business expenses you’ll be able to deduct from your tax return. If you have any further queries or concerns, the IRS publishes detailed information about each type of business expense on its website.
Self-Employment Taxes are Complicated
The first time you file taxes as a self-employed individual it will be complicated and you’ll probably be very stressed out throughout the process. Therefore, I always recommend preparing early. The last thing you want to do is wait until the last minute or it will be complete chaos.
Using free software such as the ones recommended above, keeping track of your finances, and becoming familiar with self-employment deductions and forms will make the process doable. Also, make sure to keep track of the tax guidelines as they change yearly.
What are your top tips for filing taxes when self-employed?