Being self-employed has its perks: flexibility, independence, and the ability to work on your own terms. But with those benefits comes the responsibility of managing your taxes. Tax filing can be a headache for self-employed individuals, but with the right approach, it doesn’t have to be. We’ve put together some tax filing tips for self-employed individuals to help make the process smoother and ensure you’re not leaving any money on the table.
1. Keep Track of Your Income (All of It!)
- What it is: As a self-employed person, you’ll be responsible for reporting all your income — even if you don’t receive a W-2. This includes earnings from side gigs, freelancing, consulting, or any business activity.
- Tip: Keep a detailed record of every dollar you earn. Use tools like spreadsheets, apps (such as QuickBooks or FreshBooks), or even old-school pen and paper — whatever works for you, but make sure it’s organized.
- Why it’s important: The IRS requires you to report all your income, and failing to do so can trigger an audit. Plus, the more detailed your records, the easier tax season will be.
2. Save for Taxes Throughout the Year
- What it is: Unlike employees who have taxes automatically deducted from their paychecks, you need to set aside money for taxes yourself. This means saving a percentage of your income for both federal and state taxes.
- Tip: Aim to save at least 25-30% of your income for taxes. You can open a separate savings account specifically for this purpose, so the money is there when you need it.
- Why it’s important: By saving throughout the year, you’ll avoid a tax surprise when filing. You’ll have the funds ready for your quarterly estimated tax payments.
3. Understand Estimated Tax Payments
- What it is: As a self-employed individual, you’ll likely need to make quarterly estimated tax payments to the IRS. These payments cover your federal income tax, as well as self-employment tax.
- Tip: The IRS Form 1040-ES helps you calculate your quarterly payments. Mark your calendar to pay every April, June, September, and January to avoid penalties.
- Why it’s important: Paying quarterly helps you avoid a huge tax bill at the end of the year, and it keeps you compliant with the IRS.
4. Deduct Business Expenses
- What it is: One of the advantages of being self-employed is that you can deduct a wide range of business expenses, which lower your taxable income. This includes office supplies, equipment, home office space, internet bills, and even a portion of your phone bill.
- Tip: Keep receipts for every business expense and organize them. Consider using apps like Expensify or Evernote to track your expenses.
- Why it’s important: Deductions can significantly reduce your taxable income, which in turn lowers the amount of taxes you owe. Don’t leave money on the table by missing out on valid deductions.
5. Consider Hiring a Tax Professional
- What it is: Tax laws are complicated, and as a self-employed individual, you’re dealing with more forms and deductions than a standard employee. Hiring a tax professional can help ensure you’re doing everything right.
- Tip: Look for a certified public accountant (CPA) or tax advisor who specializes in self-employed taxes. They can guide you through deductions, quarterly payments, and any complex aspects of tax filing.
- Why it’s important: A professional can save you time, money, and stress by making sure you file correctly and claim all possible deductions.
6. Track Your Mileage and Vehicle Expenses
- What it is: If you use your vehicle for business purposes, you can deduct mileage or a portion of your vehicle expenses. This includes gas, maintenance, and depreciation.
- Tip: Use an app like MileIQ or Track My Drive to keep track of business miles. If you don’t use an app, keep a log of your miles and vehicle expenses.
- Why it’s important: This is an often-overlooked deduction that can add up. Properly documenting your mileage and expenses could save you hundreds or even thousands of dollars on your tax bill.
7. Don’t Forget About Retirement Contributions
- What it is: As a self-employed person, you’re responsible for your own retirement savings. Contributing to a retirement account like a SEP IRA or Solo 401(k) can provide you with tax advantages.
- Tip: Make contributions to your retirement fund before the end of the tax year. Not only will it help you save for the future, but you can deduct these contributions from your taxable income.
- Why it’s important: Retirement accounts like SEP IRAs allow you to save much more than a regular IRA, which can give you a hefty deduction come tax time.
8. Use Accounting Software to Stay Organized
- What it is: Accounting software can help you track your income, expenses, and taxes throughout the year. It also makes filing taxes easier since you’ll have everything organized.
- Tip: Tools like QuickBooks, FreshBooks, and Xero are all great options for freelancers and small business owners. They allow you to generate reports that can be directly shared with your tax preparer.
- Why it’s important: Staying organized reduces the risk of errors and makes filing faster and easier. It also keeps you on top of your finances all year long, not just when tax season arrives.
Conclusion
Tax filing for the self-employed doesn’t have to be overwhelming. By following these tax filing tips for self-employed individuals, staying organized, and leveraging available tools, you can make the process much simpler. Whether it’s saving for taxes, tracking deductions, or getting help from a professional, a little preparation goes a long way in ensuring you file accurately and minimize your tax liability. Happy filing!