Check outNapkin Finance’s Ultimate Tax Survival Guide for the Self-Employed
Working for yourself has a ton of benefits – a flexible schedule, the opportunity to pursue projects you love, and the ability to work in your pajamas. While being self-employed can be truly rewarding, it can also be something of a headache come tax time. Between regular income taxes and self-employment taxes, Uncle Sam isn’t exactly helping pad your wallet. Still, taxes are a necessary evil, so we’ve created this handy guide to help minimize your stress this tax season.
Use separate bank accounts and credit cards for business and personal payments and expenses.
Especially if you use your personal accounts for business transactions, keep close track of what you earn and spend within your business to ensure you have the documentation you need if you are audited.
One of the worst parts about doing your taxes is that self-employed individuals often have to pay more than traditional employees. Avoid potential surprises by educating yourself on the types of taxes you’ll face.
Like everyone else, you pay income taxes on any amount you earn throughout the year, according to the marginal tax rate that applies to your income level.
Because you don’t have an employer to pay partial Social Security and Medicare taxes on your behalf, you are responsible for the entire contribution. This is what is referred to as Self-Employment taxes.
The amount that you owe is equal to twice the amount normal employees have deducted from their paychecks:
Social Security Tax
If you earn more than $200,000 (or $250,000 if married filing jointly), you will also owe an Additional Medicare Tax of 0.9% regardless of how you are employed.
The best way to reduce the amount of income tax you owe is to deduct business expenses, which you report on Schedule C. You should be prepared to back up the validity of these deductions in case of an audit, however.
Some of the most common deductions are:
The ‘employer portion’ of your Self-Employment Tax
The cost of maintaining a home office
Phone and internet bills
Food and entertainment costs
Remember, any expense for something you use for both business and personal reasons can only be partially deducted.