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What The Self-Employed Should Know About Filing Taxes

Two male business partners working together on self-employed project.

Whether you call yourself a freelancer, a solopreneur, a contractor, part of the gig economy, or simply self-employed — it’s likely you have to file tax returns and pay different types of taxes.

It’s easy to overlook this tedious task, especially when the cash starts flowing in.

But if you get it incorrect, you could wind up on the wrong side of the Internal Revenue Service (IRS), Social Security Administration and possibly your state taxing authorities. That’s nowhere to be when you establish your business.

Here’s what you should know to stay on-top of your self-employed tax responsibilities.

File Tax Returns and Pay Taxes

Whether you work for an employer or for yourself, the IRS requires you to pay taxes as you earn your income throughout the year.

When you work for a traditional employer, you fill out IRS Form W-4 to instruct their payroll department how much to withhold for federal (and state, if applicable) taxes. Your employer also calculates the amount of mandatory Medicare and Social Security taxes you’re responsible for and ensures that amount is withheld from your paycheck and paid to the taxing authorities.

It’s your responsibility when you’re self-employed.

That’s because no employer withholds or pays any taxes on your behalf.

Pay Quarterly Estimated Taxes

As a self-employed person, it’s great when you get paid in full by your clients.

However, Uncle Sam doesn’t want you to hold onto that money all year. You have an obligation to pay taxes as you collect revenue from your clients.

Once per quarter, you’re required to make estimated tax payments on what you owe.

“Estimated” means you have to determine how much tax you might ultimately owe.  It can be a bit tricky if your income fluctuates during the year.

Simply do the best you can to calculate accurate amounts of your income and expenses. You can adjust the amount for the following quarter if you under- or over-estimated your tax liability.

Always pay your quarterly estimated taxes even if you expect a refund when you file your annual return. Otherwise, the IRS might charge you an underpayment or late payment penalty.

Understand the IRS Forms for the Self-Employed

You’ll need various forms to calculate and file your taxes. If you still prepare your taxes manually, you have to attach additional forms to Form 1040, Individual Income Tax Return when file your annual returns.

However, do-it-yourself (DIY) software, such as TaxAct, simplifies this task for you. You fill out a straightforward online questionnaire, and the information automatically populates the forms.

Form 1099-MISC

As a self-employed person, you should receive Form 1099-MISC from each client you provided a service for at the end of the year. The form should list the total gross dollar amount the client paid you. That means taxes have not been deducted.

To calculate your quarterly payments, you might look at last year’s Forms 1099-MISC to estimate your income for this tax year. Of course, you’ll need to adjust those estimates if you’ve had a big swing in business from last year’s amounts.

Schedule C, Profit or Loss From Business

You’ve also have to file Schedule C, Profit or Loss From Business. On this form list your income and your detailed expenses. If you use DIY tax software, simply enter your information when prompted. The program will automatically populate your answers in Form 1040. That saves you time from having to complete both forms!

Tip: Pay attention to the section in Schedule C that asks for information about your vehicle. If your car was used for business purposes, you can deduct related expenses. Be sure to keep written records or use an app to track the miles. Later, you might have to demonstrate to the IRS which miles were for business versus personal use.

Tip: Under certain conditions you can deduct the use of your home as a business expense. However, the IRS has strict rules about the home office deduction. You must calculate and deduct only the square footage of the area you use exclusively and regularly to run your business.

Schedule SE, Self-Employment Tax

Not only do you have to pay income taxes, but you might also have to pay self-employment tax if your net income is $400 or more ($108.28 for church employees).

This payment covers your required contributions to Social Security and Medicare.

To calculate how much you owe, use Schedule SE, Self-Employment Tax.  You can pay self-employment taxes with your quarterly estimated tax payments.

As an employer, you can deduct the employer portion of your self-employment tax when you calculate your adjusted gross income on your annual return. However, it does not reduce your self-employment tax or affect your net self-employment earnings.

Keep Good Records

It’s imperative that you keep detailed records of all your business transactions.

Make sure to keep your business bank accounts separate from your personal accounts.  Commingling funds makes it much harder to showcase your business expenses to the IRS if they ever ask.

Track your income and expenses systematically so you can estimate your quarterly taxes and file your year-end return. In addition, keep track of your cash flow so you can plan to pay your taxes on time.

Save all receipts and keep organized business records. You’ll need to substantiate your self-employment income and expenses in case the IRS ever audits you.

To make life easy, set up good accounting systems when you start. That will help you grow and expand your business while making tax preparation a less arduous task.

About Valerie Rind

Valerie Rind is the author of the award-winning book, “Gold Diggers and Deadbeat Dads: True Stories of Friends, Family, and Financial Ruin.” With expertise in a broad range of personal finance and lifestyle topics, her work has been featured online in Time, Forbes, Fortune, MSN, U.S. News & World Report, The Huffington Post, PBS Next Avenue, and her own website at ValerieRind.com.

During a hiatus from a corporate career, Rind worked for a housing authority where she created its pilot personal finance program for low-income individuals. She was one of the founding volunteer moderators for the myFICO community forum. Her social media links include Twitter and LinkedIn.