Self-employed individuals have more complex tax returns than the traditional W-2 employee.
This is why so many financial experts recommend keeping business and personal finances separate as a self-employed person so when it’s time to do your taxes it’ll be much easier.
As someone who’s been self-employed for more than a decade these are my top tax tips for people who are self-employed.
Make your estimated tax payments (for both state and federal)
Most self-employed people find out the hard way early on the importance of making estimated tax payments throughout the year.
If you don’t make your estimated tax payments, you’re going to be hit with a penalty for nonpayment.
Keep in mind that you are responsible for making federal and state (if applicable) estimated tax payments each year.
After your first year of being self-employed, you can avoid the penalty by dividing your prior year’s tax bill into four as a guide for how much you need to pay each quarter.
This way if you make less than the year before you’ll get money back (and avoid a tax penalty) or if you make more, you’re still responsible for the remaining balance, but you won’t be hit with the nonpayment penalty (in most cases).
Keep track of your income and expenses throughout the year
With so many financial apps available for self-employed individuals there’s really no reason why you shouldn’t be keeping track of your income and expenses throughout the year.
By keeping track of your income and expenses throughout the year you’ll make filing your taxes so much easier.
For me, I personally prefer to make sure I close out my books for each month. This not only helps me with taxes when it’s time, but it also lets me monitor if I’m meeting my financial goals for the year and if there are some business expenses that I can cut to maximum my business profits.
Take advantage of all of the deductions you qualify for
One of the perks of being self-employed is that you can qualify for a ton of deductions that can lower your tax bill.
Some deductions that you may qualify for include:
- The home office deduction: For this make sure that you are only using the area for business work.
- Continuing education: If you’ve decided to further your education to advance your business you can receive a deduction for things such as classes, books, etc.
- Office supplies: Printer paper, stamps, and other office supplies also qualify for a deduction. Plus, larger items such as printers and laptops that are used solely for work can be deducted too. Special rules apply for the larger items so make sure you check out the current tax law to make sure that you’re deducting those items correctly.
- Credit card and/or loan interest: If you have a business credit card or a personal credit card that is used exclusively for business purposes you can receive a deduction for the interest. Also, if you’ve taken out a business loan, working capital loan, or used other loan services for your business that interest is deductible as well.
- Phone bill: Those who use a business phone line can deduct their phone bills come tax time.
- Business travel and meals: If you’re required to travel and/or take clients out for meals, the money that you spend on this may also be deductible.
- Advertising: If you’re running ads for your business these expenses also qualify for a deduction.
For a full list of tax deductions available for the self-employed visit the IRS official website.
Try filing your taxes yourself
If your taxes don’t require a bunch of extra forms (i.e. you sold real estate, stocks, etc) then you’ll probably be able to manage to file your taxes yourself using free software such as Credit Karma Tax.
As long as you’ve stayed on top of your finances throughout the year it’ll pretty much be entering in the numbers you already have.
By filing your taxes yourself you’ll save yourself money by not having to pay a tax expert to file for you and that saved money can go towards your tax bill.
Know your options if you cannot afford your tax bill
If your tax bill is much more than you prepared for, know what options you have. You’ll still be responsible for filing by the tax deadline regardless of if you have the money to pay or not, or you’ll face a late filing penalty fee.
I recommend filling your taxes as soon as you have all of the required information so you can stay on top of your tax bill.
If you can’t pay there’s the option of setting up a payment plan with the IRS, which ideally you start trying to get them on the phone to do so as soon as you know your balance amount.
Alternatively, if you can take out a personal loan that would have a lower interest rate than the IRS you can consider that.
Finally, since you’ll probably know your tax amount in January, provided you get all of your documents to file then, you also have the option of taking on extra work to pay off as much of your tax debt before the April deadline so you’ll pay less in interest if you still find yourself needing to take out a loan or get on a tax payment plan with the IRS.
These tips will help make tax season easier for you as a self-employed individual
One of the downsides of being self-employed is that your tax situation becomes a little trickier. However, with these tips, you’ll find that tax season will be a little easier for you.