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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.

3 min read
Lifestyle

Help! My Friend Is a No Show

Email armchairpsychologist@swaaymedia.com to get the advice you need!

Help! My Friend Is a No Show

Dear Armchair Psychologist,

I have a friend who doesn't reply to my messages about meeting for dinner, etc. Although, last week I ran into her at a local restaurant of mine, it has always been awkward to be friends with her. Should I continue our friendship or discontinue it? We've been friends for a total four years and nothing has changed. I don't feel as comfortable with her as my other close friends, and I don't think I'll ever be able to reach that comfort zone in pure friendship.

-Sadsies

Dear Sadsies,

I am sorry to hear you've been neglected by your friend. You may already have the answer to your question, since you're evaluating the non-existing bond between yourself and your friend. However, I'll gladly affirm to you that a friendship that isn't reciprocated is not a good friendship.



I have had a similar situation with a friend whom I'd grown up with but who was also consistently a very negative person, a true Debby Downer. One day, I just had enough of her criticism and vitriol. I stopped making excuses for her and dumped her. It was a great decision and I haven't looked back. With that in mind, it could be possible that something has changed in your friend's life, but it's insignificant if she isn't responding to you. It's time to dump her and spend your energy where it's appreciated. Don't dwell on this friend. History is not enough to create a lasting bond, it only means just that—you and your friend have history—so let her be history!



- The Armchair Psychologist

Need more armchair psychologist in your life? Check out the last installment or emailarmchairpsychologist@swaaymedia.com to get some advice of your own!