Beginner’s Tax Guide for the Self-Employed

beginner’s-tax-guide-for-the-self-employed

Many people have dreams of being self-employed, but you’re different: You actually have a shot at it. You have the start-up capital and a solid business plan that will help make your dream a reality.

Get every dollar you deserve with unlimited tax advice from experts who know self-employment taxes inside and out. Whether you’re a freelancer, independent contractor, small business owner, or have multiple streams of income, TurboTax Self-Employed can help you uncover the industry-specific deductions you qualify for. Plus, you can get up to an additional $20 off when you file with TurboTax Self-Employed.

But before you take your first step into the world of entrepreneurship, there’s a checklist of things you’ll need to do if you don’t want to get nailed by tax problems while your venture is still in its infancy.

Know your entityOne of the most important decisions you must make as you start your journey toward self-employment is determining what your business structure will be.

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.

Sole proprietor:

If you are a sole proprietor, your business income and expenses should be reported on Schedule C. You’ll be responsible for paying self-employment taxes—such as Social Security and Medicare.Partnerships and Corporations:

If you have a business partner, you will likely file as either a partnership or as a corporation. A partnership must file an information return, but it typically does not pay federal income tax. Information returns are tax documents (the most common being Form W-2) that businesses and taxpayers must file to report certain business transactions to the Internal Revenue Service. Usually, you use Form K-1 to report an individual’s share of the partnership and S-corporation income to the federal government.Unlike a sole proprietorship or a partnership, a C-corporation is recognized as a separate tax-paying entity for federal tax purposes. That means the corporation may be able to take special deductions. It also means the profit it earns is taxed at the corporate level, then taxed again on the recipient’s tax return if it is distributed as a dividend to shareholders.S-corporations are similar to partnerships in that the income typically flows through to your personal tax return. But they are like C-corporations in that you normally set a salary and withhold payroll taxes at the corporate level for the owner. Some or all of your income may be reported to you on a Form W-2 at the end of the year.One of the advantages of being an S-corporation is the taxpayer’s ability to choose a salary, subject to reasonable guidelines. But there can be serious tax ramifications should a person severely underpay himself when the business is making money because wages are subject to payroll taxes.Although an LLC is a legal business structure, it is a state-level designation that is not generally recognized for federal tax purposes. It must file as a corporation, partnership, or sole proprietorship.

Get ready for taxesNow that you know what you are, you can take the steps that can lead to tax deductions down the road. That may first involve securing a tax ID number.

You can get a tax ID number for free. It’s always a good idea for self-employed people to get a separate tax ID number for their business so they can give it to customers that require a W-9 form from them. A tax ID number is required if you have employees.If you can carve out a little nook in your home that you can dedicate solely to your business affairs, you’re setting yourself up for a great home office tax deduction. It does not have to be a separate room, as a desk in the corner of the kitchen will qualify. But it does have to be used exclusively for business tasks, so the kitchen table probably does not qualify.

If you’ve never been a stickler about keeping track of the money you earn and spend, now is the time to make it part of your daily routine.

Personal finance tools like Mint.com can help self-employed individuals categorize and keep track of their business and personal income and expenses separately. QuickBooks from Intuit offers a range of financial products for businesses to manage their finances, whether you’re just starting out or established and expanding.Scroll to Continue

Our TurboTax Live experts look out for you. Expert help your way: get help as you go, or hand your taxes off. You can talk live to tax experts online for unlimited answers and advice OR, have a dedicated tax expert do your taxes for you, so you can be confident in your tax return. Enjoy up to an additional $20 off when you get started with TurboTax Live. 

Cruise into tax deductionsOne of the most common tax deductions self-employed taxpayers can claim is automobile expenses. So don’t fret over the steadily depreciating value of that new van you purchased to make deliveries for your catering business. Several tax options can help you recoup some of the money you spend maintaining and using your car for business-related purposes.

To get the maximum deductions for your business vehicle, you must maintain a written log of business miles. You must also jot down your odometer reading at the beginning and end of each year so you’ll know your total miles.

You may choose to use the standard mileage rates set by the federal government or deduct the actual expenses.

Using the standard mileage rates involves keeping track of your business miles and multiplying these miles by the mileage rate provided by the IRS.Deducting actual expenses allows you to deduct specific expenses including depreciation or lease costs (subject to “luxury limits” that disallow deductions for expensive cars), gas, insurance, repairs, and car washes.If your car is over 6,000 pounds in gross weight, you are not likely subject to the luxury rules and therefore can get a higher deduction for depreciation or your lease payments. All expenses must be ‘ordinary and necessary’ to deduct.

It’s not all about the cars, though. A bevy of other deductions are available to the self-employed, such as:

office suppliesreference materialtravel expensesBut keep in mind they require meticulous bookkeeping and receipt filing to satisfy IRS rules.

A new responsibilityWith the freedom of being a self-employed individual comes the sole responsibility for paying taxes.

In addition to income taxes, you may be required to collect and pay sales tax, a state-mandated surcharge that varies from state to state. Business owners should check with their state government to see if they must charge customers sales tax for their products or services.

If you should have collected taxes and don’t, then you can be personally liable for the sales tax you should have collected but didn’t.

Individuals may also be held responsible for a use tax, which is applied to all the items a person buys for the business and should have paid sales tax on but didn’t.

Whether you file as a sole proprietor, partnership, or corporation, individuals often have to pay estimated federal and state taxes on profits from the business.

And finally, if you have employees on your payroll, including yourself, they and you are required to pay Uncle Sam the standard payroll taxes on salaries.

TurboTax Self-Employed will ask you simple questions about your life and help you fill out all the right forms. Perfect for independent contractors and small businesses. We’ll search for over 500 tax deductions to get you every dollar you deserve and help you uncover industry-specific deductions.


Leave a comment

Your email address will not be published. Required fields are marked *