Looking for self-employed tax tips to ensure you’re staying in compliance with IRS tax laws, all while avoiding overpaying in income taxes?
Then you need to take a look at these 6 tax tips for self-employed taxpayers!
Let’s start with keeping your nose clean with the IRS. Because let’s be honest, NO ONE wants to go through an IRS audit.
And if you do go through an IRS audit, you want to pass with flying colors!
For self-employed taxpayers, it’s best to prevent any red flags to avoid being audited, and you can do that by making sure you are following all the correct tax laws.
Let’s dive in!
Bookkeeping
Number one and most important on my list is a clean and organized set of books!
This is SO important for several reasons. I can’t stress enough that you need to invest in a good bookkeeper or invest in bookkeeping courses if you do your own business finances. If you do your own business finances, click here for the free bookkeeping template to work with!
If you are a self-employed individual with a bookkeeping system consisting of a shoebox… then PLEASE review the reasons below why you need to put an end to that system TODAY!
Prevents errors with the tax preparers-
- Let’s face it, if you’re not organized and you expect your tax preparer to just figure it out, then you are risking overpaying in taxes by not being observant of your business income and expenses.
- Tax preparers are human, and they make mistakes on returns that come with organized tax documents. So, you can only imagine how many mistakes and missed transactions happen when you hand an unorganized box of business transactions to a tax preparer in the middle of their busiest time.
Prevents overpaying in taxes –
- As a business owner, you should be aware of how your business is doing, not just at the end of the year, but throughout the year!
- If you have a clean set of books that are maintained throughout the year then you have the ability to catch transactions as they happen, or at least way sooner than annually.
- You also have the ability to work with your tax preparer on tax planning throughout the year if you have a maintained set of books. This is VERY beneficial, because you can review where you are currently sitting tax wise throughout the year to plan on making business decisions prior to the end of the tax year.
- For example, if you have a big business purchase that you’ve been putting off because you don’t want to spend the money. Then you can work with your tax preparer and find out in September that your business is doing very well this year which results in your tax bill increasing. Then your tax preparer may advise you to make that big business purchase prior to the end of the year to reduce your tax bill. You are putting money back into your business and preventing overpaying in taxes.
- If you get audited – the IRS will not deal with an unorganized mess. So, you will either need to organize it or risk getting slapped with a big tax bill. When dealing with IRS audits, its best to know your stuff. You should be very organized and confident in your numbers that you reported. And the only way to do that is to have a clean set of books!
Finally, a nice current set of books helps you make business decisions. I know this isn’t entirely for taxes, but I wish this was common knowledge amongst business owners.
Sadly, so many business owners are checkbook budgeters. They only operate from their checkbook balance.
You as a business owner – need to know your numbers. The best way to do that is to review your business books on a regular basis!
1099’s
I hope that all of you self-employed taxpayers are aware of the 1099 filing requirements. Because the penalty for not filing 1099’s is pretty hefty!
If you hire any labor or vendor to provide a service for your business, then you may need to file 1099’s.
The 1099 filing deadline is February 1st. For example, if you needed to file 1099’s for the 2021 tax period then you should have submitted them by February 1st of 2022.
If you pay at least $600 to hired labor throughout the tax calendar year, then you need to send that individual or business a 1099. The only exception is if that hired labor is incorporated.
As a business owner, the best practice for 1099’s is to have ALL hired labor complete a Form W-9 PRIOR to paying them. That way you guarantee that you have all the necessary information for your tax preparer to file the 1099’s for you at the end of the year.
Because let me tell you, it is a PAIN to track down that hired labor at the end of the year to get their address and taxpayer ID number.
Be aware that 1099’s are different than hiring employees. If you are not paying any payroll taxes on a hired person, then they will need a 1099. If this hired person is on your payroll then you do NOT send a W-2 and a 1099 to the same person.
There are several other 1099 forms that you may need to file as a business, but hired labor is the most common one. Please take the time to review The 1099 Cheat Sheet to be sure you are filing all the applicable 1099’s for your business.
Quarterly Estimates
It amazes me how many self-employed taxpayers are not aware of quarterly estimates.
Quarterly Estimated Tax Payments are prepaid taxes. It’s basically your self-employed way of withholding the appropriate tax dollars throughout the year to prevent underpayment penalties.
So, you are staying in compliance with the IRS by submitting payments throughout the year. While saving yourself from overspending on unnecessary tax penalties.
Setting your business up with quarterly estimates also breaks up your year-end tax bill into easier to handle payments instead of coming up with that money all at once on April 15th.
These payments are due, for both Federal and State, on April 15th, June 15th, September 15th, and January 15th.
For example, if you are setting up 2022 quarterly estimates. You would need to plan on making a payment on the following dates:
- April 15th, 2022
- June 15th, 2022
- September 15th, 2022
- January 15th, 2023
The quarterly estimates are set up when completing your tax return. Therefore, to set up your 2022 quarterly estimates, you would do that when submitting your 2021 tax return.
There are a few options for you to make the quarterly estimated tax payments. My favorite is setting up automatic withdrawals when filing your tax return.
Because, unfortunately, sending in quarterly estimates is something that several people forget to do.
Automatic withdrawal prevents you from missing a payment or sending in late payments. You would just need to be aware of your dates to have the appropriate balance in your bank account on the due dates.
You can be penalized for not paying your quarterly estimates that were scheduled with your prior year tax return.
For example: on your 2021 tax return, you agreed to pay $400 to the IRS for 2022 quarterly estimated tax payments. You paid the April 15th, June 15th, and January 15th payments, but forgot to send in the September 15th payment. The IRS was expecting that $400 payment on September 15th per your agreement on the 2021 tax return. Since you did not follow through with the agreement you may be subject to nonpayment penalties.
Other payment options include mailing in the payment with the Form 1040-ES, paying online through EFTPS.gov, or through the IRS2Go.app.
Again, automatic withdrawal is my recommendation if you do quarterly estimates.
Reach out to your tax preparer to see if you need to start sending in Quarterly Tax Estimates!
SEP-IRAs
Just because you are self-employed doesn’t mean you’re excluded from retirement plans.
There is a Simplified Employee Pension Plan (SEP) that allows self-employed individuals to contribute to a traditional IRA.
SEPs can provide a significant source of income at retirement by allowing self-employed individuals to contribute 25% of net earnings from self-employment (not including the deduction for SEP contributions) up to $58,000.
This is a huge difference in annual contribution limits compared to setting up a regular Roth or Traditional IRA, which is $6,000 per year.
You can still set up a regular IRA and contribute to a SEP-IRA as a self-employed individual.
The contribution made to a SEP-IRA is a deductible expense. So, you get to use your SEP-IRA contributions as a business deduction for the current tax year.
The contributions must be paid by April 15th to use on your prior year tax return as a deduction.
For example, if you want to deduct a SEP contribution on your 2021 tax return, you need to make the SEP contribution by April 15th of 2022.
Please note that since you get to deduct your SEP contributions over the years, you will pay taxes on your SEP-IRA withdraws once you reach retirement age. Since these are pretax contributions.
This is a great option for self-employed individuals. It not only is a business deduction but a wonderful retirement plan. You can also offer this as a retirement plan for your employees!
Mileage or Vehicle Expenses
This tip may only apply if you drive for your business.
Keeping track of your mileage is a great business deduction and one that most people don’t think about. You can deduct any miles used for business purposes (i.e. travel to work sites, meetings with clients, errands to pick up supplies, etc.)
The 2022 standard mileage rate is 58.5 cents per mile.
If you take the mileage deduction you can’t take actual vehicle expenses, like fuel and repairs.
Some years, it may work better to use the mileage rate, and some years it may work better to take actual expenses.
I recommend picking one option and stick with it to avoid throwing red flags by changing it up every year.
Regardless of the option you choose, you will still need to track your mileage to have records of your business vehicle use.
If you end up using the actual vehicle expense deduction, you are only allowed the percentage of business miles used in comparison to total miles for the year.
For example, let’s say you used 2,500 miles for business purposes on your vehicle and 1,500 miles for personal use. Then you can only use 63% of your vehicle expenses.
It’s best to check with your tax preparer to see what option best suits you.
If you use a vehicle for business purposes and plan to use either tax deduction – then I would invest in a mileage app.
See the mileage app recommendations below:
- MileIQ
- Free version: up to 40 trips per month
- Full version: $5.99/mo, or $59.99/year
- Features:
- Automatic Mileage Tracking
- Set work hours
- Integrates with Freshbooks and Excel
- QuickBooks Mileage Tracker
- If you are already using QuickBooks Online or QuickBooks self-employed then you already have the capabilities to track miles through the app
- QuickBooks Online Simple Start is $12.50/mo
- Features:
- Track Miles
- Track Income & Expenses
- Invoice & Accept Payments
- Maximize Tax Deductions
- Run Financial Reports
- Capture & Organize Receipts
- Track Sales & Sales Tax
- Send Estimates
- Manage 1099 Contractors
- Features:
If you are already set up with another accounting software, then using the MileIQ app would be best for you.
If you have QuickBooks or are looking for bookkeeping software, then QuickBooks Online Simple Start would be a great option.
QuickBooks has several pricing options. I would NOT start out with the QuickBooks self-employed only because you will soon realize that you don’t have many capabilities. Then you will have to transfer all of your information to QuickBooks Simple Start.
I recommend avoiding that headache by just starting with QuickBooks Online Simple Start. This will allow you to have everything you need in one place.
Keep it simple!
There are several great capabilities with QuickBooks and the mileage tracker is one of them!
Home Office Deduction
With a qualified home office, you can expense some of your otherwise nondeductible expenses. For instance: mortgage interest or rent, home insurance, utilities, etc.
You may qualify for the home office deduction if these two things apply to you:
- you regularly use a portion of your home exclusively for business purposes. This deduction applies to both homeowners and renters.
- also, if your home is your principal place of business.
There are two options when calculating the home office deduction: the regular method, and the simplified method.
The Regular Method allows you to claim a tax deduction based on the percentage of your home office square footage in comparison to your total home square footage. With this percentage, you can claim home-related expenses.
Calculate the home office deduction using the regular method with these steps:
- Determine your home’s total square footage and the square footage of your home office.
- Divide the home office square footage by the total home square footage
- Multiply the percentage by the sum of your home’s allowable expenses (i.e., mortgage interest or rent, insurance, utilities, repairs, etc.)
There is no maximum to how much you can claim when using the regular method.
However, there is a maximum when using the simplified method. The maximum home office deduction that you can take with the simplified method is $1,500. Which is $5 per square foot with a maximum of 300 square feet.
The perks of using the simplified method are, of course, because it’s simple! The other highlights include allowing you to claim home-related itemized deductions in full on Schedule A. Also, for the years the simplified method is used, there is no home depreciation or recapture of depreciation.
Typically, if your home office is small, then you will get a slightly larger deduction by using the simplified option. Of course, this does depend on the area that you live in. If you live in a high-cost area then you may benefit more from the regular method with a small home office. If your home office is bigger, then it may be worth doing the extra calculation and recordkeeping to take the maximum deduction.
Hopefully, these tax tips help set your business up to be better than it was yesterday!
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