Presented by TaxSlayer1
Many people find that working for themselves provides the flexibility and extra income that they don’t get from a traditional job. But being self-employed makes you subject to certain tax rules and requirements, and that can get complicated if you’re not planning ahead. Here are five common mistakes that self-employed taxpayers make—and how you can avoid them ahead of time.
1. Underpaying your taxes
If you were a W-2 employee, your employer would withhold tax from your paycheck to cover your portion of Social Security and Medicare. But when you work for yourself, that responsibility falls on you. So, if you make more than $400 net earnings from being self-employed, you’re required to pay self-employment tax in addition to your federal and state income taxes.
The self-employment tax rate is 15.3%. You can pay self-employment tax in quarterly payments or in one lump sum.
Here’s the thing: If your tax bill is $1,000 or more when you file, the IRS may charge you a penalty. By making quarterly estimated payments you’ll effectively pay your tax bill throughout the year, so you aren’t penalized for underpaying your taxes.
2. Underreporting your income
It doesn’t matter whether your self-employed or you work for an employer—if you don’t report all your earnings to the IRS, it increases the likelihood that you’ll be audited.
If you’re a contractor, your client will send the IRS a record of anything they paid you during the year. If you don’t report it on your end, it is only a matter of time before the IRS figures out you misreported your earnings.
IRS Form 1099-NEC is the tax form used to report non-employee compensation (i.e., money paid to an independent contractor for work performed). You should receive a Form 1099-NEC from anyone who paid you $600 or more during the year.
If you received $600 or more from your customers by debit or credit card payments, or through apps like Venmo or PayPal, you should get an IRS Form 1099-K from each company that processed those transactions for you.
3. Not claiming all your expenses
When you’re self-employed, you can deduct several work-related expenses as long as they are considered necessary and ordinary to your business. Here’s a look at some of the most popular business expense deductions you might consider:
Supplies and software – The IRS allows you to deduct the cost of off-the-shelf software products the year you put them into use. “Off-the-shelf” means the software is available to anyone for purchase (not custom designed for just your business). You can also write off work-related office or creative
supplies, such as printer paper, envelopes, pens, and even paper clips.
Marketing – The IRS understands that to promote your business and attract customers, you must advertise. Business cards, website subscription fees, even the cost of hiring a designer can be deducted on your tax return
Home office – The amount you can deduct depends on a few things, like the size of your space and the method you choose to calculate your tax deduction. With the simplified method, you can deduct $5 per square foot of home office space, up to 300 square feet ($1,500 max).
Mileage – If you use your vehicle to get from job site to job site, or for transporting your supplies to a point of sale, the IRS will allow you to deduct vehicle expenses based on the number of miles you travel. But be careful! If you drive the same vehicle for work and for personal travel, you’ll need to track and report only those miles that were for business.
Training – Deduct course-related expenses if you enroll in a program for professional development. Some examples are a UX design course for a freelance designer or a certification course for an independent project manager.
4. Throwing out receipts and records
As part of your business ventures, you might make purchases, sell products, manage payroll, or engage in other transactions. Organizing, storing, and being able to retrieve the documents that support your income, inventory, expenses, and assets is a must for tax purposes.
Generally, it’s a good idea to keep records for at least 7 years. Some of the records you may need include:
- sales invoices
- receipts for business-related purchases
- bank deposit slips
- financial statements
- canceled checks
- Forms 1099-K
- Forms 1099-NEC
5. Paying too much to file your self-employed taxes
Your self-employed tax situation is unique—but that doesn’t mean you should have to pay high fees to get your return filed. TaxSlayer Self-Employed is specially designed for the small business owner, the independent contractor, the side hustler, the 1099-er —in other words, for self-employed taxpayers just like you.
TaxSlayer Self-Employed makes it easy to enter your business income and expenses and to maximize your deductions, so you pay only what you owe. You’ll also get unlimited phone, email, and live chat support—and you can talk to a tax professional with self-employed expertise for your most difficult questions.
1. This content is presented by TaxSlayer. Please note that indi makes no representations, warranties, or guaranties regarding this information or the use of TaxSlayer.