Ask self-employed solopreneurs what they like best about working for themselves, and they’ll tell you it’s the freedom and control over their own destiny. But there’s a flip side: handling the challenge of tackling their own taxes.
If you’ve worked for an employer most of your career, you’re accustomed to filling out a few tax forms and letting someone else tackle the withholding and the paperwork. When you’re self-employed, it all falls on your shoulders. To paraphrase Spiderman’s uncle, “With great freedom comes great responsibility.”
Even if you enlist an accountant’s help, you’ll need to understand the basics to make sure you don’t overlook important deductions or get derailed by an unexpected tax bill. It can all be daunting.
However, help is on the way. We’ve got some great links to give you a handle on the basics of taxes, help you figure out your next steps, and ease any fears.
Start with this excellent article at Bench.co, which breaks down the basics of self-employment taxes for you. You’ll also find out how to calculate the estimated tax payments you’ll need to make on a quarterly basis. “Paying taxes four times a year won’t be the most fun thing you’ll do as an entrepreneur,” the site explains, “But proper preparation, organized small business record-keeping, and tax-ready books can help make it one of the most painless tasks.” Painless? Sounds like #goals to us.
Read this informative article from TurboTax for an informative introduction to the basic structures available to one-person businesses and what each means for tax liability. “One of the most important decisions you must make as you start your journey toward self-employment is determining what your business structure will be,” the article explains. “Whether your company will be a sole proprietorship, an LLC, a partnership, an S-corporation, or C-corporation will affect how your taxable income flows through to your personal tax return.”
Next, start looking for ways to minimize your tax burden. You can’t take advantage of all the deductions available to self-employed taxpayers if you’re not aware of them. Read this Intuit/Quickbooks article for great guidance on what you can deduct. As the article explains, “Self-employed persons can generally write off expenses that fall into three categories: things you use exclusively in operating your business, things you eat in the course of doing business, and things related to the exclusive business use of the place where your business operates.” Of course, that’s the simple version; there are plenty of rules to make it more complicated. This article gives you a good start, with a quick overview of the in’s and out’s of deducting expenses related to travel and hotel, your home office, utilities, professional development, advertising and marketing, software, mileage and gas, and incorporation. (And if you got stiffed by a client who skipped out on paying a bill, you might be able to deduct that, too. Who knew?)
For the definitive word on filing self-employment tax, of course, go straight to the horse’s mouth – more precisely, IRS.gov, the official website of the Internal Revenue Service. This link explains the “need to know” basics of self-employment tax.
For future reference, bookmark this link. It’s the IRS Direct Pay site, for quarterly estimated taxes, and may save you some time when it comes time to make your first estimated quarterly tax payment. Another option is the Electronic Federal Tax Payment System (EFTPS®), a free service of the U.S. Department of the Treasury, which allows you to schedule payments 24 hours a day, 7 days a week, up to 365 days in advance. (Enroll early; to access the system you’ll need a PIN, which is sent through the mail.)
Finally, the obligatory caveat: while these links give you a good overview of federal taxes, they’re far from comprehensive. Keep in mind, too, that your business may also be liable for state and local taxes as well as sales taxes. Consult a tax professional to make sure you’re on top of all the tax issues that may affect your business.