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7 Must-Know Tax Tips for the Self-Employed

3 min read
Finance

Working for yourself has a ton of benefits — a flexible schedule, the opportunity to pursue projects you love, and the ability to work in your pajamas. While being self-employed can be truly rewarding, it can also be something of a headache come tax time. Between regular income taxes and self-employment taxes, Uncle Sam isn't exactly helping pad your wallet. Still, taxes are a necessary evil, so we've created this handy guide to help minimize your stress this tax season.

Keep Detailed Records

  • Use separate bank accounts and credit cards for business and personal payments and expenses.
  • Especially if you use your personal accounts for business transactions, keep close track of what you earn and spend within your business to ensure you have the documentation you need if you are audited.

Divide and Conquer

  • If you think you'll owe $1,000 or more in taxes this year, then you'll most likely need to make quarterly 'estimated' tax payments.
  • You can determine your estimated taxes using Form 10410-ES.
  • You'll need to complete a new 1040-ES each quarter if your earnings are different than your estimate for the previous quarter.
  • The IRS has specific deadlines for each quarterly payment, so make sure you're paying on time.
  • If you miss a quarterly payment or neglect to pay at all until the end of the year, the IRS may charge fees and interest on late payments.
  • If you over-estimate and your quarterly payments end up being too high, then you'll still be able to collect a return at the end of the year, just like regular employees.

Track Down Documents

  • Self-employed people often work for multiple clients, meaning you may need to collect multiple documents before you file your annual return.

Form 1099-MISC

  • As an independent contractor, you should receive a Form 1099-MISC from any client that has paid you $600 or more throughout the year.

Form 1099-K

  • However, if you receive payment electronically - such as via PayPal or other third-party payment processors - then the responsibility for issuing a Form 1099 lies with that online service.
  • Third-party payment processors report income to you and the IRS via Form 1099-K.

Take Responsibility for Your Return

  • Your clients are required to file 1099 forms by January 31, so you should receive documentation of your reportable income by early February. If not, contact your clients and ask for it.
  • Even if you don't receive any documents from your clients, you still have to report your income to the IRS.
  • Know What You'll Owe

One of the worst parts about doing your taxes is that self-employed individuals often have to pay more than traditional employees. Avoid potential surprises by educating yourself on the types of taxes you'll face.

Know What You'll Owe

One of the worst parts about doing your taxes is that self-employed individuals often have to pay more than traditional employees. Avoid potential surprises by educating yourself on the types of taxes you'll face.

Income Taxes

  • Like everyone else, you pay income taxes on any amount you earn throughout the year, according to the marginal tax rate that applies to your income level.

Self-Employment Taxes

  • Because you don't have an employer to pay partial Social Security and Medicare taxes on your behalf, you are responsible for the entire contribution. This is what is referred to as Self-Employment taxes.
  • The amount that you owe is equal to twice the amount normal employees have deducted from their paychecks:

Social Security Tax:

  • Regular Employee - 6.2%
  • Self- Employed - 12.4%

Medicare Tax:

  • Regular Employee - 1.45%
  • Self- Employed - 2.9%

Total:

  • Regular Employee - 7.65%
  • Self- Employed - 15.3%

File the Right Forms

You'll need to fill out a few more forms than you would for a regular tax return, including:

  • Form 1040 - As always, you need to complete the Personal Income Tax return. But you'll need to complete the Long Form version (not the 1040-A or 1040-EZ) because you have to include business income.
  • Schedule SE - This is document is attached to Form 1040 and will help you determine the amount of Self-Employment tax you owe.
  • Schedule C - This is where you report your net profit or loss from your business. You can use the simplified version, Schedule C-EZ if:
    • You have a net profit from your business
    • Your total business expenses total $5,000 or less
    • Don't have any inventory
    • Have only one business and no employees

Deduct What You Can

The best way to reduce the amount of income tax you owe is to deduct business expenses, which you report on Schedule C. You should be prepared to back up the validity of these deductions in case of an audit, however.

Some of the most common deductions are:

  • The 'employer portion' of your Self-Employment Tax
  • The cost of maintaining a home office
  • Phone and internet bills
  • Car Payments
  • Travel Costs
  • Food and entertainment costs

Remember, any expense for something you use for both business and personal reasons can only be partially deducted.

For more tax help from Napkin Finance, click here.

How to Learn Much More From the Books You Read

It is one thing to read and another thing to understand what you are reading. Not only do you want to understand, but also remember what you've read. Otherwise, we can safely say that if we're not gaining anything from what we read, then it's a big waste of time.

Whatever you read, there are ways to do so in a more effective manner to help you understand better. Whether you are reading by choice, for an upcoming test, or work-related material, here are a few ways to help you improve your reading skills and retain that information.

Read with a Purpose

Never has there been a shortage of great books. So, someone recommended a great cookbook for you. You start going through it, but your mind is wandering. This doesn't mean the cookbook was an awful recommendation, but it does mean it doesn't suit nor fulfill your current needs or curiosity.

Maybe your purpose is more about launching a business. Maybe you're a busy mom and can't keep office hours, but there's something you can do from home to help bring in more money, so you want information about that. At that point, you won't benefit from a cookbook, but you could gain a lot of insight and find details here on how-to books about working from home. During this unprecedented year, millions have had to make the transition to work from home, and millions more are deciding to do that. Either way, it's not a transition that comes automatically or easily, but reading about it will inform you about what working from home entails.

Pre-Read

When you pre-read it primes your brain when it's time to go over the full text. We pre-read by going over the subheadings, for instance, the table of contents, and skimming through some pages. This is especially useful when you have formal types of academic books. Pre-reading is a sort of warm-up exercise for your brain. It prepares your brain for the rest of the information that will come about and allows your brain to be better able to pick the most essential pieces of information you need from your chosen text.

Highlight

Highlighting essential sentences or paragraphs is extremely helpful for retaining information. The problem, however, with highlighting is that we wind up highlighting way too much. This happens because we tend to highlight before we begin to understand. Before your pages become a neon of colored highlights, make sure that you only highlight what is essential to improve your understanding and not highlight the whole page.

Speed Read

You might think there have been no new ways to read, but even the ancient skill of reading comes up with innovative ways; enter speed reading. The standard slow process shouldn't affect your understanding, but it does kill your enthusiasm. The average adult goes through around 200 to 250 words per minute. A college student can read around 450 words, while a professor averages about 650 words per minute, to mention a few examples. The average speed reader can manage 1,500 words; quite a difference! Of course, the argument arises between quality and quantity. For avid readers, they want both quantity and quality, which leads us to the next point.

Quality Reading

Life is too short to expect to gain knowledge from just one type of genre. Some basic outcomes of reading are to expand your mind, perceive situations and events differently, expose yourself to other viewpoints, and more. If you only stick to one author and one type of material, you are missing out on a great opportunity to learn new things.

Having said that, if there's a book you are simply not enjoying, remember that life is also too short to continue reading it. Simply, close it, put it away and maybe give it another go later on, or give it away. There is no shame or guilt in not liking a book; even if it's from a favorite author. It's pretty much clear that you won't gain anything from a book that you don't even enjoy, let alone expect to learn something from it.

Summarize

If you're able to summarize what you have read, then you have understood. When you summarize, you are bringing up all the major points that enhance your understanding. You can easily do so chapter by chapter.

Take a good look at your life and what's going on in it. Accordingly, you'll choose the material that is much more suitable for your situation and circumstances. When you read a piece of information that you find beneficial, look for a way to apply it to your life. Knowledge for the sake of knowledge isn't all that beneficial. But the application of knowledge from a helpful book is what will help you and make your life more interesting and more meaningful.