Taxes for the Self-Employed: A How To Guide
Many freelancers and small business owners simply outsource their taxes to an accountant. But when it comes to taxes for the self-employed, a DIY approach can have exponential benefits.
Then again, perhaps I’m biased. In doing my own taxes, I’ve learned how to keep better records and how to maximize methods to reduce the amount of taxes I pay. And it’s not as hard as you might think. Whether you’re a freelancer, small business owner, or just earned a little extra income on the side this year, follow these tips to master your own taxes.
Estimated Taxes Are Your Friend. Maybe Your Best Friend.
Nobody wants to end up with a tax bill on April 15th, and for freelancers the best way to avoid this is to pay estimated taxes throughout the year . Estimated taxes are (generally) required, but the IRS makes it easy–I promise. And by getting into this habit as soon as possible, you’ll be forced to review your revenue and expenses on a regular basis. Analyzing your profit regularly can have a positive impact on your bottom line–and help you make more money than you might have otherwise.
You can pay your estimated taxes online through the EFTPS website . There are a few different ways to calculate your estimated tax payments, but the easiest way is simply to pay 100% of last year’s tax bill. To figure this out:
- Find a copy of your 1040 from last year and scan down to line 61. This number is the total amount of tax you owed last year.
- Divide that number by 4.
- Pay that amount (online via the EFTPS website) on each of the estimated tax filing deadlines. Set calendar alerts to remind yourself so you don’t miss a payment. (For 2013 that would be: 4/15/2013, 6/17/2013, 9/16/2013 and 1/15/2014.)
If your income this year has increased or decreased significantly from last year, then you’ll want to spend some time calculating a more accurate estimated quarterly tax payment .
Don’t forget to pay your state (and city if applicable) estimated taxes as well. Do a quick google search to find your state’s online payment site, and use the same formula as above to calculate your estimated state/city tax payments. (Side note: if you’re a freelancer who works from home and are sick of paying state income taxes, consider moving to one of these no-income tax states instead .)
Get Organized and Stay Organized
Every self-employed person knows that the key to reducing taxes is to deduct as many expenses as possible . And the key to deducting as many expenses as possible is to keep track of them during the year. So many online tools exist to simplify this process, that you simply have no excuse but to take advantage. That said, I really don’t think you need to pay for fancy accounting software, particularly if you’re operating a fairly simple one-person business. Here’s how I manage my own business expenses:
- Have a separate checking account and credit card for your business expenses. I use the Amex Simply Cash Business credit card for every single business-related expense I have. I never–never –use it for personal expenses. This is the easiest way to keep track of and maximize your business expenses (tax deductions) throughout the year. For the record, I also have a free business checking account through Banco Popular .
- Link your business accounts to a (free) service like Outright to categorize your business expenses on a regular basis, rather than trying to sort through a huge stack of receipts the day before your taxes are due.
Just Do It — for Sole Proprietors
If you’re a freelancer, consultant or any other type of “sole-proprietor ,” filing your taxes is fairly straightforward. Just gather your business records for the year (or login to your Outright account), set aside a few hours to follow the prompts using TurboTax or whichever online tax software you prefer, and force yourself to complete
the task. It’s really not that hard. Don’t get intimidated by the complexities of the tax code–most of it probably doesn’t apply to you. If you follow directions and double check your work, you will be fine. And if you’ve paid your estimated taxes throughout the year, then you may even end up with a refund. At the very least, if you owe taxes, it shouldn’t be too much of a surprise.
If this is your first year filing taxes as a self-employed person, it might be a bit more painful. But power through, and pay attention. Simply filing your taxes can help you understand how to keep better records moving forward, so that the process just gets easier and easier.
If You Owe Money
If you end up with a tax bill you can’t afford, please do yourself a favor. Do not, under any circumstances, pay taxes with your credit card. Even if it is your business credit card.
The IRS offers far more reasonable interest rates than the average credit card company. You will be far better off financially if you set up an installment plan with the IRS . than if you pay the lump sum with your credit card and start accruing interest on the balance. The IRS is really not as mean and scary as they may seem. Don’t be afraid to call someone and try to get a bit of help if you need it.
As you earn money in the new tax year, make sure to set aside a chunk of it for your estimated tax payments so you don’t end up owing the IRS again. If you’re overwhelmed and/or confused, start by setting aside 30-40% of your revenue for taxes. Then, seek professional guidance to adjust that amount and calculate accurate estimated tax payments to get back on track. Many local small business associations have CPAs who volunteer time to answer questions for self-employed individuals, so you might even be able to get help for free.
Limited Liability Entities (S-corp, LLC, etc)
If you’ve formed a partnership or incorporated your business, you’ll have a few extra steps when it comes time to file your taxes. The good news is online services like TurboTax . H&R Block and TaxAct still make it pretty simple with their easy to follow prompts. And your tax deductions are more or less the same as sole proprietors. Though the price for online tax filing software is more expensive than the sole-proprietor versions, the cost is still significantly less than what you would pay an accountant.
Oddly, the online tax services seem to think that all S-corp business owners are PC-users. Translation: if you are a Mac user, like I am, and your business is set up as an S-corp, you won’t be able to use the mainstream tax software. If you still want to persevere with the DIY-approach to your taxes, try downloading the TaxSoftware.com iPad app . It’s definitely not flashy, but it worked just fine for me.
Keep in mind that the IRS expects a bit more from you, both in filing your annual taxes as well as your quarterly requirements. Navigating the complex world of small business taxes can seem overwhelming, but with a little bit of effort up front you can still maintain control over your tax situation yourself. Keep track of all of updated deadlines and to-do lists by bookmarking this website: Small Business Taxes & Management . Another less than flashy tool, the site has every tax detail a business owner could possibly need.
If you’re still scratching your head when it comes to taxes, you can always send me an email . Self-employed individuals stand to gain quite a bit from creating a comprehensive financial plan–both for business and personal finances. Taking the guess work (and the stress) out of earning and managing money allows more time and energy for the things that truly matter–like growing your business. Or perhaps even better, taking a much-needed vacation.Source: laurenlyonscole.com