As a self-employed person, you don’t have the luxury of a boss to withdraw income tax, social security contributions and Medicare payments from your earnings. Instead, you need to take care of it yourself. The process can be daunting, but with a bit of know-how, it certainly doesn’t need to be.
Before you file your first tax return, here’s what you need to know:
Small Business Deductions
According to the Internal Revenue Service, you can write off most expenses you incur in order to run your business. The list of eligible business expenses includes everything from paying your employees and buying staples — to keeping on the lights in your home office.
If you work from home or use your vehicle for business, you may even qualify to write off a few of your house and driving expenses. Insurance, utilities and repairs can all be included in your deductions.
Home Office Considerations
The taxes and deductions that apply to a home office do have a few restrictions. In order to claim a space as your home office, you must use it exclusively for work. It must also be where you do the bulk of your work.
Check out the details on the IRS’s simplified home office deduction. As of 2015, you can deduct $5 per square foot of your office — up to a maximum of $1,500.
Alternatively, you can calculate the portion of your home taken up by your office and then deduct that portion of your home’s bills. For example: If you have a 100 square foot office and your home is 1,000 square feet, you can write off 10 percent of your mortgage and utilities — as well as repairs related to your entire home. While these deductions don’t seem like much separately, they can add up to thousands of dollars in savings.
Filing Your Tax Return
As a self-employed individual, you will receive 1099 forms from companies you have contracted for — but you may also have income that isn’t reported on a 1099. Whether your income appears on a 1099 form or not, you need to track all of your payments and expenses throughout the year. This is where the extra responsibility of self-employment really comes into play.
You are responsible for reporting all of your income and expenses on a Schedule C IRS form. There are two types of this form: Schedule C, Profit or Loss from Business, and Schedule C-EZ, Net Profit from Business. Be sure to review the details for each type to know which form to use.
You also must fill out a Schedule SE, Self-Employment Tax form, and file all of these with your 1040, Individual Income Tax Return.
In many cases, you can file your taxes using your social security number as your business identification number. If you hire employees, decide to form a limited liability corporation or owe excise taxes, then you need to set up an Employer Identification Number with the IRS. You may also have to file several additional forms at tax time. (Remember: Report everything!)
To avoid the arduous process of filling out individual forms, you can use tax preparation software. Look for a program designed specifically for self-employed individuals; it can guide you through the process by asking questions. As long as you have your income, receipts and financial records, it’s a fairly straightforward process.
Paying Quarterly Taxes
If you haven’t paid any taxes throughout the year, you may owe a lump sum at tax time. You can avoid this by paying quarterly taxes — but keep in mind that the IRS may require you to pay quarterly payments (or risk late penalties and fines).
To help you estimate your quarterly taxes, the IRS offers tools and online calculators specifically for self-employed individuals. You may also use Form 1040-ES to estimate how much you should submit; this form comes with a booklet of instructions, payment slips and envelopes.
While self-employment taxes may sound complicated, there are solutions for making them simple. With a bit of organization and the right tools, remitting your quarterly taxes can feel as natural as paying the phone bill. If you can believe it, filing in April can be a relatively painless process.