Don’t Fear Tax Time! A Comprehensive Guide to Self-Employment Tax Tips

While being your own boss comes with a sleuth of perks, it’s not all sunshine and roses. The gig also comes with its own set of challenges, one of them being self-employment tax and all the associated paperwork.

As a self-employed individual there really is no way to get around tax — it should be as important as any other aspect of your business. Unless you want an unfriendly visit from the IRS, and no one wants that.

Tax filing is not all that complicated once you get the hang of it and implement these self-employment tax tips. Check out this blog for more.

An Overview of Self-Employment Taxes

In the United States, you are viewed as a business owner if you are self-employed or work as an independent contractor. As outlined by the Internal Revenue Service (IRS), this means you are subject to different filing rules and tax breaks, compared to other employees.

Whether you choose to do all of your own tax filings or hire the help of a professional, such as this e-filing service, you have to be as thorough and accurate as possible.

So, is there an earning threshold that requires you to file taxes?

If you earn over $400 in a year due to self-employment, you must file a tax return. However, if a business, client or customer does not pay you more than $600, they do not need to issue you a Form 1099.

When you file your taxes you use the same form as any other employee — the 1040. However, you must use the Schedule C section to calculate your net income and losses for the year.

If you record less than $5,000 in business expenses for the year, you must use a Schedule C-EZ, based on these conditions:

• You did not record a net loss for the year
• There are no other employees in your business
• You do not handle or own inventory
• You only have one business
• You are not claiming a deduction based on the use of your home as business premises

What is the tax rate for those who are self-employed? At present, it’s 15.3 percent. But bear in mind that self-employment tax also includes your tax contributions towards Social Security and Medicare.

As mentioned, there are few perks in terms of what you can claim as tax-deductible when you are self-employed. Some of these include:

Working From a Home Office

This counts as your place of employment so you are able to count it as a tax write-off. However, you must regularly and exclusively use your home office area specifically for business.

Some of the expenses that can be deducted in this tax write-off include real estate taxes, rent, utilities, insurance, and mortgage interest. This is all based on the square footage of your home and your office space.

Retirement Fund Planning

By opening up a retirement fund, this is an opportunity to save on your future tax bill and save for your older age at the same time. It’s a win-win. A good retirement plan to take out as a self-employed individual is the Simplified Employee Pension Plan (SEP).

This fund allows you to save 25 percent or less of your net earnings up until the tax deadline. For 2021, that’s a minimum saving of $58,000 in order to claim for a tax break.

Benefit From Your Business Trips

If you travel often for your work, then this is a 100 percent deductible tax perk. As long as you fly to any other city within the U.S. you can claim and deduct 100 percent of the travel costs.

To add to this, you can also deduct expenses on hotels or accommodation, and up to 50 percent on meals. But bear in mind these expenses must relate to the days you’re spending on business.

Read on for a few more helpful tax filing tips you should know.

1. Always Estimate Your Income

Before you get the ball rolling on your tax planning, you need to figure out where you stand in terms of your earnings and the tax bracket you fall under.

This will save you from making unnecessary expenditures when you don’t really need the deduction. If you foresee that you will be in a higher tax bracket for the coming year, make as many deductions as possible to counter the higher tax rate.

Estimating your overall business income helps to take the guesswork out of tax planning and can save some money in the long-run.

2. Time Your Spending Well

You want to be smart about your business expenditure. If you time it well, you can start depreciating what you buy for your business within the same tax year.

So, if you buy a business asset by December 31, you may be able to deduct the expense and its entire cost in one year. You’ll need to take a Section 179 deduction for this purpose.

Remember that business expenditures always count within the year you made the purchase — even if you’re paying it off on a credit card. When it comes to business supplies or inventory, try not to buy so that it counts as inventory within the same year, unless you need to.

Technically, you can only deduct for inventory once you’ve sold the product.

3. Capitalize on Medical Insurance Deductions

Remember that as a self-employed individual, you can deduct health insurance premiums from your tax filing. This includes premiums for yourself, your dependents, and even your spouse. This must be dedicated as an adjustment to income.

This deduction also includes premiums for long-term care insurance — it’s still deductible even if it’s in your own name, and not the business name, too.

4. Stick To a Sole Proprietorship

If you work alone as a self-employed person, keep your tax filing as simple as it needs to be. This means that you only need to stick to a Schedule C, Sole Proprietorship filing. If you choose to go into business with a partner or form a corporation, this can make tax filing a little more complicated.

It’s also a wise idea to invest in liability protection in the form of liability insurance — but discuss your options with your lawyer first.

5. Streamline and Automate Your Record Keeping

If you really want to simplify the process of filing taxes, organization is your best friend. And shoving business receipts into a shoebox does not count! Establish a professional filing system for all of your business paperwork and make sure to keep your documents in a safe, well-protected place.

It’s also a good idea to invest in automated software that synchronizes your bank accounts, business operations, and record-keeping. This way you can save time and avoid simple tax errors that can set back your tax submission.

6. Maximize on Business Deductions

This is one of the best ways to reap the benefits of being self-employed. Where ever you can, you want to deduct an expense (or a portion of it) as a business deduction, and not an itemized deduction.

This allows you to reduce your adjusted gross income and the overall amount you pay in self-employment tax.

7. Make Sure You’re Taxed Appropriately

There is such a thing as the ”hobby trap” when it comes to filing taxes and IRS classification. In some cases, they may deem your business a hobby, rather than an actual for-profit business. In this instance, you can deduct expenses up to the amount of your income.

If you’re earning a decent profit from your business, that’s no biggie. But in the eyes of the IRS, you have to be turning a decent profit for 3-5 years before classified as a for-profit business. You also need to operate as a business and keep good tax records.

On the flip side, if your work really is a hobby that you love and happen to earn an income from it, you want to keep it that way. This is because hobby income is not self-employment taxable, which deducts up to 15.3 percent of your income!

That’s a hefty chunk of change if you aren’t earning enough to balance out the tax deduction.

8. Claim For Your Charitable Contributions

In most cases, it’s not possible to deduct or claim for any charitable contributions you might have made as a business. But, there is a loophole to remember. If you give money to a charity in exchange for advertising, this counts as a business expense and is tax-deductible.

In short, this is a better tax benefit than any other itemized deduction, so it’s a handy tip to keep in your arsenal.

9. Keep Tabs on Your Business Mileage

Remember that you can also deduct for the mileage you rack up on your car (for business purposes only), as well as for gas, oil, and wear-and-tear. However, you have to provide the records to show for it.

That’s why it’s so important to be diligent with your record-keeping if you plan on claiming this expense when filing your taxes. Your records must be mileage driven, show a business purpose, and the exact date.

Even if it’s just a trip to your local post office, keep a record of it!

Looking For More Self-Employment Tax Tips?

We hope these self-employment tax tips will help you to prepare for the upcoming tax season, especially if you are new to self-employed tax filing. If it all seems overwhelming at first, you can always outsource your tax filing to a professional who can help keep your affairs in order.

If you’re a budding entrepreneur and need daily motivation, be sure to explore the rest of this site for all the business-minded tax tips and news you need. Find topics on financial management, tax, marketing, and more!