Freedom. That’s what comes with being self-employed. You can make your own schedule and be your own boss. But it can quickly complicate your taxes. Where do you get the forms you need? How do you know what deductions you should take? And when should you seek some professional tax help? Read on… and avoid surprises this tax season!
How does being self-employed affect my taxes?
If you’re self-employed, or even just freelance on the side, be prepared to pay self-employment tax in addition to federal and state income tax. You are considered self-employed, and are required to file forms Schedule C and Schedule SE, if you earned $400 or more (from all sources) from self-employment in 2014.
What is self-employment tax and why do I owe so much?
Self-employment tax is your share of Social Security and Medicare taxes you owe when you work for yourself. It is entirely separate from–and in addition to–federal and state income tax. Normally, when you work as an employee, your employer pays ½ of this tax for you, and withholds the other ½ from your paycheck, so it gets paid regularly without you noticing. When you work for yourself, there is no employer to withhold these taxes or pick up half the tab, so you become responsible for paying the entire amount, which totals 15.3% of your self-employed income after expenses. The problem: you could owe zero income tax, but still owe a hefty chunk in self-employment tax, due to the low threshold ($400).
How Can I Reduce Self-Employment Tax?
Only ordinary and necessary business expenses taken against your self-employment income on your Schedule C will reduce your self-employment tax. Other income tax deductions you might take, such as student loan interest, mortgage interest, property tax, etc., do not reduce the amount of self-employment tax you owe. This is why it pays to keep good records of your expenses and to work with a tax professional who specializes in self-employed individuals.
Aren’t estimated payments optional?
Nope. The tax code states that taxes must be paid throughout the year as income is earned, not just every April 15th. When you’re self-employed, you are required to track your income, calculate your tax, and make quarterly estimated payments. If you owe more than $1000 in tax on April 15th, you might get hit with a penalty for not paying enough estimated tax, which is literally adding insult to financial injury. Avoid this by keeping tabs on your income, and work with a tax professional to make sure you’re paying enough per quarter.
I’m a renter. Can I still take the home office deduction?
Yes, the home office deduction is available to renters provided all the required conditions are met. Talk with a tax professional to see if you qualify. And be sure to ask about the California renter’s credit, which is a nice bonus from the state to qualified renters.
Can I deduct my car expenses as a freelancer?
Absolutely! Under the right circumstances, auto expenses are deductible, either by using the standard mileage rate or a percentage of actual expenses. You need to keep track of your business mileage in either case. There are mileage tracking apps available to make keeping the required log much easier.
I never got a 1099 from one of my freelance gigs. Do I still have to report it?
If you earned over $400 from self-employment in 2014, you must report all income, whether you received a 1099 or not. Suppose you did some work, got paid, and never received a 1099 for any number of reasons–but the company you did the work for reported the expense of paying you on their tax return. The mismatch in the IRS computers would potentially generate a letter from the IRS asking you about unreported income, which is not good news.
I paid someone for help on one of my projects this year. What do I do?
It’s a business expense. If you pay any individual $600 or more during the year, you need to issue them a 1099-MISC. You can then deduct the amount paid as a business expense, which in turn reduces your self-employment tax.
Have more questions? I have answers! Contact me for advice and tax assistance:
A Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230
- (323) 363-2325
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