10 Essential Tax Tips for the Self-Employed

Self-employed taxpayers normally earn income by carrying on a trade or business. Here are the most important tips for the self-employed:

1. Sole proprietors and independent contractors are two types of self-employment. Taxes can be complex for the self-employed. Check out the IRS Self Employed Individuals Tax Center.
2. Self-employed taxpayers must file a Schedule C, Profit or Loss from Business.
3. If possible, open a separate bank account for your business if the number of business-related transactions is high. This will save you time on getting your records organized at tax time and will save on tax preparation fees.
4. For those making a profit, self-employment and income tax may need to be paid. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax.
5. Keep track of ALL your business income at least monthly or quarterly, including cash payments. You will have to report ALL of this income on your tax return.
6. Taxpayers can deduct expenses paid to run a business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and proper for a trade or business.
7. Save and organize receipts by category. I recommend QuickBooks for Self-Employed. The phone app allows to quickly sort expenses in your bank account between the personal and business-related, categorize them by preset or customizable categories, and prepare an income statement that is essentially the foundation of Schedule C on your tax returns. As a certified QuickBooks ProAdvisor, I can get you a steep discount off monthly subscription fees (to bring the monthly cost down to $4).
8. Always track mileage in a mileage log. There are convenient apps for your phone these days. QuickBooks for Self-Employed has a built-in mileage tracker. MileIQ, TripLog are free and provide the records that meet the mileage deduction substantiation requirement.
9. In most cases, taxpayers can deduct expenses in the year paid or incurred. Some costs must be ‘capitalized,’ however. This means deducting the cost over a number of years.
10. Self-employed taxpayers generally need to make quarterly estimated tax payments. IRS Publication 505, Tax Withholding and Estimated Tax, has details on making those payments.

Be sure to contact us when you are contemplating starting a business! There are many tax planning strategies that should be utilized ahead of time to reduce both income and self-employment taxes.

It is also important to have your tax returns prepared professionally if you are self-employed. Schedules C, as a rule, attract increased IRS attention. A CPA or Enrolled Agent who are permitted to practice before the IRS and who are familiar with the audit techniques of Schedule C filers can help you minimize the exposure through accurate and audit-proof reporting of your income and expenses.