Death and taxes. For the self-employed, these can feel like two sides of the same coin. As your own boss, handing the government your hard-earned cash may be hard to fathom, causing you to penny pinch—even though taking control of your businesses tax preparation could be costing you more.
The self-employed are taxed on net self-employment income, a deduction of expenses from gross revenue. Two separate federal taxes are applied against this net income:
(1) Income tax
(2) Self-employment tax
In order to get the most from your tax return and to ensure all expenses are accounted for, practice organization and bookkeeping as well as the following 5 tips:
1. Keep Track of Income and Expenses
Stay organized with a folder where you keep all business-related receipts that will be used for tax write-offs. At the end of the year, file any 1099 forms that you get from contractors and use a 1040 Schedule C form to report income and expenses related to the self-employment.
2. Know Your Write-Offs
One perk to working for yourself and owning your own business are small business tax deductions. The expense of keeping the business afloat such as basic necessities, office equipment and rent are just a few of the items that can be justified as a write-off.
Below are 5 deductible items that must be documented:
• Travel expenses
• Office supplies
• Insurance premiums
• Social security
3. Pay Your Quarterlies
Unlike most employed workers, the self-employed do not have regular taxes deducted from their monthly pay such as Federal withholdings and social security. For freelancers who only file taxes once a year, an extra fee is added to the already expensive filing. Play it safe by paying quarterly estimated taxes, using Form 1040-ES. To make sure you always have enough, it is recommended to set aside a portion of each business deposit (25-40%) for taxes. To avoid spending your tax reserves, place this amount in a savings account until it is time to pay in.
4. Take Advantage of Retirement Savings
This may seem like a longshot for folks who find it hard to prioritize something so far away when you need funds right now to pay the price of being a self-employed entrepreneur. Though you may be entertaining thoughts of selling your business one day and riding off into the sunset worry-free, it’s always good to plan for the unthinkable.
(1) SEP-IRA – Simplified Employee Pension for setting aside pretax savings.
(2) Individual 401(k) – Also known as “Solo 401(k)” – For self-employed business owners plus a spouse.
(3) SIMPLE IRA – for small businesses and freelancers.
• More on retirement plans for the self-employed
5. Wear-and-Tear Deductions
More commonly referred to as “depreciation deduction”—this type of income tax deduction recovers the value lost as property deteriorates.
It may be a challenge to get your finances in order but with these five basic guidelines you should be able to keep the fruits of your labor close while still fulfilling the tax requirements of a freelancer. Good luck! You are on your way to becoming a great boss!