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The Ultimate Guide to Filing Self Employment Taxes

October 30, 2019

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Self-employment has many benefits and it also has a few drawbacks. While it’s not perfect, and not for everyone, I’ve found that it has been a great way for me (and others I know) to build wealth and follow a passion.

However, one of the drawbacks of being self-employed is having to file your own taxes.

The rules, structure, and more can be lot different when you file self-employment taxes versus when you’re filing taxes as an employee. 

If you’re currently self-employed, you may need some guidance on ways to make it easier to file self-employment taxes. And if you’re considering self-employment, you may be looking for information before taking the leap.

While I am not a tax professional, here is what I think every self-employed person should know about filing self-employment taxes.

When You Need To File Self-Employment Taxes

If you’re self employed and you made at least $400 in the tax year, you must file a tax return. It’s the law, and there is no way around it.

The only ways you wouldn’t have to file self-employment taxes are:

  • If you didn’t make $400 within the year
  • Or if the money you made was in the form of a hobby (not a business)

A hobby is defined as an activity that occasionally produces income, but its main purpose is for you to pursue the activity, not make a profit. Besides that, there are 9 total criteria the IRS uses to distinguish between a business and a hobby.

You still have to file hobby income on your tax return, but it is reported as other income, not self-employment income. You can also itemize deductions on your hobby expenses. 

If you’re working a full-time job and you also earn self-employment income on top of that, here is more information on how to file properly. If you need more clarification or help, a tax accountant can answer your specific requests. 

Know Your Business Entity

Before you file self-employment taxes, you need to know what your business entity is.

For example, are you filing as a sole proprietor? Are you an LLC? Did your business change its entity during the year?

Tax laws vary by the classification of your business, so knowing what your business entity is beforehand can make filing easier.

For example, someone who pays employees as an S-Corp is going to file differently than someone who worked by themselves as a sole proprietor. But filing wrong can cost you more money, and possibly even get you audited by the IRS. 

Here are the entities that are recognized by the IRS.

Sole proprietors

As a sole proprietor, you would report your business income and expenses on Schedule C of your personal tax return. You are personally responsible for paying your self-employment taxes, including the full share of Social Security and Medicare.

Right now, the self-employment tax rate is 15.3% — 12.4% for Social Security and 2.9% for Medicare. You’ll also be required to pay income tax.

Partnerships and Corporations

Partnerships and corporations file taxes differently than sole proprietors.

Partnership

Have a business partner? You’re more likely to be in a partnership or corporation. For a partnership tax return, you must file an information return. However, you typically don’t pay federal income tax.

Instead, you’ll most likely use a Form K-1 to report your individual share of the partnership and S-corporation income to the federal government.

S-Corporation

An S-Corp is similar to a partnership. Your income is going to go on your personal tax return. However, where partnerships and S-Corps differ is that S-Corps are more like C-corporations in that you would have a salary and would withhold payroll taxes at the corporate level as the owner.

So, just like with other employees, some or all of your income would come as a Form W-2. This means you will have to file business taxes for your corporation, and a personal tax return for your own salary or W-2 income. Filing two tax returns will likely mean spending more time and money on filing.

C-Corporation

A C-Corp is recognized as a separate tax-paying entity for federal tax purposes. In other words, when you set up a C-Corp, you may be able to take advantage of special deductions that S-Corps and partnerships can’t. However, any profit that is earned is taxed at the corporate level, then taxed again on individual tax returns if distributed as a dividend to shareholders. 

LLCs

LLCs are not recognized as federal business entities. If you are an LLC, you still have to file as a corporation, partnership or sole proprietorship. It is important to talk to a tax accountant about which option is best for you and your business.

Paying Quarterly Taxes

If you’re self-employed, you’ll most likely need to pay quarterly taxes. This includes your income tax and self-employment tax for the year, broken down into four quarterly payments. If you aren’t sure what you need to be paying quarterly based on what you’re earning, a tax accountant can help you find a more specific number.

A good rule of thumb is to set aside 25-30% of whatever you or your business earns for taxes.

If you live in a state that has state taxes, you might want to increase that to around 35%, just in case. Of course, a tax accountant can help you decide exactly how much you should be setting aside, but I saved 30% over the last few years and it’s worked for me.

Make Quarterly Taxes Easier By Paying Online 

If you don’t want to forget about paying your quarterly taxes, you can pay them online. All you need is your Social Security Number, or an Employer Identification Number (EIN) and a PIN. You can get your own EIN for free through the IRS website. It does take a few weeks, but you can keep this number and PIN indefinitely. 

If you want to take things a step further and manage your quarterly payments, plus know what you need to pay upfront (without hiring an accountant) try Quickbooks Self-Employed. This bookkeeping system allows you to pay your taxes online, file your taxes for free, and know how much you owe every quarter based on your income and expenses throughout the year.

Tip: Always Pay on Time  

Always pay your tax bill on time. You can be penalized for making late payments, and fees can add up quickly if you don’t have the money to pay for them. This also goes for quarterly tax payments. If you don’t make your quarterly tax payments, you may have to pay a penalty to the IRS.

Take Advantage of Tax Deductions 

Whatever money you’re spending for your business can most likely be considered a tax deduction. Here are just a few deductions you can claim on your taxes: 

  • Automobile expenses 
  • Course and products that you purchase for professional development 
  • Office supplies 
  • Travel expenses (if related to your profession)
  • Website, domain, and hosting fees 

There are so many deductions you can claim when you’re self-employed. But those are just a few that you can (and should) take advantage of.

When you’re self-employed, you’re subject to paying a lot more in taxes than an employee would, but deductions help offset those costs. So take advantage of them and use them wisely.

What NOT to Deduct

Keep in mind that certain things may not be a tax deduction, and you should never lie to get more deductions.

Hair, makeup, and clothing is not deductible (clothing is only if it has logos and has to be worn). Eating out because you were too tired to fix food is not deductible. Traveling to Cambodia and then writing about it doesn’t mean you were there for business, so it’s not deductible. Just be smart about deductions and only take advantage of those that are legit. 

Have A Bookkeeping System

If you’re filing self-employment taxes for the first time, you may not have been keeping close track of your income, expenses, and more. To make sure that you stay organized from now on, have a bookkeeping system. 

You don’t necessarily have to opt for the most expensive or fancy option. But at the very least, your bookkeeping system should be able to track what you’re earning and what you’re spending, plus it should have reports to make tax filing easier, and it should have an easy way to share information with a tax accountant should you choose to use one.

A great bookkeeping option is FreshBooks, and they also offer the ability to invoice clients, get paid, and generate extra reports. You can find out more about FreshBooks in our review here.

Even if you can’t afford to pay for a tax accountant, you have to make it a priority to have a bookkeeping system for your business. Many cost less than $50 a month. So they won’t break the bank even for a new entrepreneur or small business owner. 

Start Getting Organized Right Now

It is never too early to get your tax information and paperwork ready. Keep a file near you, or a folder on your computer, to help you stay on track and organized when it comes to your business finances. You won’t regret keeping all of your receipts, tracking income, and keeping track of your quarterly tax payments. 

If you haven’t yet, sign up for all of your necessary filing information, like an EIN. Keep all of this information in your tax folder and reference it when needed. Come tax time, you’ll be prepared, and ready, to file your taxes. 

File Self-Employment Taxes Easily 

Filing taxes can seem like a stressful and daunting time for those who are self-employed. But it doesn’t have to be. As long as you pay the required amount of taxes, and pay them on time, you should be good to go. Staying organized, having a bookkeeping system, and using professional help can make a huge difference in tax time when you’re self-employed. 

Here is what every self-employed person needs to know to file self-employment taxes.
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