What I wish I knew the first time I filed self-employment taxes

March 8, 2021 | Business Management
Tax Time tips for self-employed

Note from the editor: The author, Shelly Strom, is a longtime freelance writer who owns her own marketing consulting business. All of the information in this article is based on real experience and lessons learned as a contractor. Enjoy!

This original article was published in March 2019 and was updated in March 2021.

Self-employed? Add these tips to your tax ‘to do’ list.

Working for yourself is a good feeling. You get the independence and autonomy to make your own schedule and set your own goals, and you can invest in yourself and your personal and professional growth. You also get to become an expert in your interests and passions and make money from them on your own terms. Those of us who have been at this for a while can attest to the ways we also develop an expertise in having the discipline and a sense of responsibility that comes in handy during a particular time of year: Tax season.

As a freelancer, aka an independent contractor, you have a few more “to do’s” in completing your taxes than as an employee. I’ve compiled a list that gives an overview so you can get organized, move forward on your taxes, and avoid penalties and fees.

Things I wish I knew about filing taxes as an independent contractor before I became my own boss

1. Follow the proper (aka legal) procedures for setting up your business.

For instance, any business must have a license from the city or other local jurisdiction where it’s located. These licenses typically are fairly straightforward to apply for online.

To find out exactly what you need, do an online keyword search for your city (or, if you’re far outside of any city limits, use keywords for your local area) and “business license.” One of the first hits should be a page like this, which is the page I used when I applied for my license. The Small Business Administration, as an agency of the federal government, has helpful information.

When you apply for a business license, you’ll be asked what type of entity your business is. Freelancers often operate as a sole proprietor, although setting up a corporation, such as an LLC, may make sense. If you’re not sure what type to pursue, the best advice is probably going to come from a professional, such as a small business advisor.

2. Know which documents you’ll need to gather to complete your taxes.

Think about the two categories of information captured on your tax forms, income, and expenses. For your income, you need your invoices, IRS 1099 form(s) from your client(s) showing what they paid you in the previous year, W-2’s if you worked as an employee, and forms you might have related to any other income (such as proceeds from investments).

You likely had expenses related to your business that you can report to the IRS as deductions from your income. Find a list with additional detail about that here. You may also find this checklist on H&R Block helpful in identifying items to gather so you can prepare your taxes.

Once you’ve gathered your information, you might be curious to use this tax calculator from Intuit TurboTax for a quick estimate of your tax liability.

3. Make sure you use the correct tax forms.

The IRS has simplified its Form 1040, the form U.S. taxpayers use to file annual income taxes. You may need to use additional forms, depending upon your situation. The IRS explains Form 1040 and others and has links to forms.

4. Pay what you owe… and pay on time

Know that you must pay self-employment tax, along with federal income tax and whatever taxes your state and local jurisdictions charge. The federal government charges self-employment tax, and it amounts to Social Security and Medicare taxes.

If you work as an “employee,” your employer will withhold these from your paycheck. As a freelancer, no taxes are withheld which is why it’s smart to save as you go.

Set aside at least 25-30 percent of your income to cover this self-employment tax. This adds up to a sizeable amount for people who spend most of their working time as a freelancer, so you don’t want to come up short when you go to file. To get an idea of your other big tax, the federal income tax, look at where your income falls and the corresponding tax rate. Also, be aware of any state income tax.

5. You can write “it” off.

Keep all of your receipts associated with your business. Freelancers and other sole proprietors are eligible for a host of deductions that offset income (updated for 2021), potentially reducing your tax bill. There are many expenses in the list of write-offs including home office supplies and equipment, education, retirement investments to name a few.

Read up on the Qualified Business Income Deduction, which allows 20 percent deduction for pass-through businesses on qualified business income. Every tax year is subject to updates, so be sure to visit these resources before filing each year. See some of the changes to consider when filing your 2020 return.

You may be able to write off some home expenses as part of your business. If the area where you work in your home is dedicated as your office, you may have a nice-write off. Your office space has to be just that—you can’t count a nook in your kitchen as your office because that room primarily serves a non-business function. If you have a room dedicated as office space, you’re in luck. A number of details go into calculating this deduction, which you should learn more about before you claim it.

Having a banking account and credit card dedicated to your business will make tax time easier, and you won’t regret setting them up either if you get audited by the IRS!

6. Don’t forget to file your taxes.

This might sound self-explanatory and if you’re reading this article—it’s a good indicator that you’re on top of your taxes, to begin with—but many people out there, including small business owners, will go years without filing taxes. In the end, they always pay the price—literally.

When you’ve gathered everything and you’re ready to file, you can either use snail mail or online service. Some online providers are free, others cost a relatively small amount and provide benefits like helping you find all the deductions for which you are eligible. TurboTax offers online filing tailored for self-employed filers. Efile is another option.

7. Consider paying for pro support.

Making sure your accounting is being done “by the book” all year long will make the following tax season a breeze. If you don’t mind paying, you can hire a tax accountant (“tax accountants near me”). You also may qualify to access low-cost tax pros. Or use an online subscription. Consider these options:

Our Liveops agents shared a few tips:

(Please note: Liveops does not offer tax advice. We recommend that you reach out to a tax professional for guidance)

  • Keep careful records of EVERYTHING used in your home business - square footage of your home office, electricity bills, computer usage, etc.
  • Find a trusted self-employment tax calculator to estimate how much tax you will owe
  • Try to keep up with your paperwork on a monthly basis, and make sure you have folders to organize all of your receipts
  • If you hire a professional, be sure to do your due diligence and research before giving them any of your personal information.

 

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Shelly Strom

Shelly Strom

Shelly Strom is a writer for Liveops. With a background in business journalism and corporate communications, she specializes in researching the call center industry to uncover key trends, news and analysis.