Working for yourself has some major perks. You get to take on the work you want, complete it on your own timeline and charge rates you set yourself. Unfortunately, being self-employed also entails some less savory parts of business too — like taxes. But taxes don’t have to be the overwhelming task they’re made out to be.
Here’s what you need to know about tax forms, the documentation you need to collect and how to make the process easy and stress-free.
Forms You Need to File
What forms do you need anyway? Here’s a summary:
Miscellaneous Income (1099)
The W-2 is the staple of those who work full-time for someone else. As a self-employed individual, you’ll deal mostly with 1099s. Every client you earn $600 or more from, will send you a 1099 form. (For earnings less than $600, you still need to report the income but won’t receive the form from the client.) There are exceptions to this — mostly concerning third-party network transactions — which you can read about on this IRS page.
Social Security and Medicare Taxes (1040 or Schedule SE)
Social Security and Medicare taxes are separated when you work for another company; they’re combined into one tax (called the Self-Employment tax) when you work for yourself. Use a Schedule SE or Form 1040 to pay this tax. You can expect to pay 15.3 percent of your earnings toward the tax, but you also can deduct half of that percentage from your gross income (7.65), which is the portion normally paid by an employer.
Since state taxes differ for each state, form numbers also vary. Find your state’s tax information and forms on the Federation of Tax Administrators website.
Miscellaneous Forms (Schedule C, C-EZ or 1065)
If you’re self-employed and earn more than $400 (net) from self-employment, or if you meet any of the other filing requirements listed in the instructions for Form 1040, you must file an annual tax return by April 15 using Schedule C or C-EZ.
If you work another job besides your self-employed venture, you also might have a W-2. In a partnership or LLC situation, you’ll have a 1065.
Documentation You Need to Keep
By collecting documentation all year long, you take the pressure off yourself come tax time. Here are the various documents you need to support your tax forms:
- Revenue receipts
- Business expense receipts (including receipts for any home office expenses or travel mileage you plan to claim)
- Vendor Tax Identification Numbers (solicited by sending out Form W-9)
- Receipts for money paid to contractors
- Your tax register
- Your bank statements
Specifics You Need to Determine
Before you can file, you need to crunch some numbers.
Your Tax Bracket
To file for both state and federal taxes, you need to determine your tax bracket. Based on your income, see which you fall into here.
Your Estimated Taxes
As a business, you should be making the required estimated tax payments each quarter. Quarterly taxes are due in April, June, September and January.
Use the 1040-ES form and your previous year’s tax return to calculate what your estimated payment should be. You also can use the QuickBooks Self-Employed online calculator. Remember it’s better to overestimate than underestimate.
You may be exempt from quarterly obligations under certain conditions detailed in the form instructions. For instance, you are exempt from the quarterly requirement if you:
- Expect to owe less than $1,000 that year after subtracting withholding and refundable credits
- Expect your withholding and refundable credits to be less than the smaller of: 90 percent of the tax to be shown on your return or 100 percent of your previous year’s return (assuming your previous return covered the entire year).
You are exempt from the January 16, 2018 quarterly payment if you file your annual 2017 taxes by January 31, 2018 and pay your entire balance with your return.
When it comes to business expenses, you can deduct many of them, from home office use to miles driven to and from meetings, so long as they meet the IRS requirement and you have documentations to back them up. Compare your receipts to the list of IRS-approved deductible expenses. The bottom line is you should keep all documentation for all your business-related expenses.
If your business expenses are more than your income, you can deduct your loss from your gross income on your Form 1040, page 1. Some losses may be limited (per Publication 334).
Don’t wait until the last minute to gather all the documentation you need. Procrastinating will only make it worse come the end of the year and could even result in penalties if you’re missing documentation or fail to file on time.
QuickBooks Self-Employed can help you plan ahead. It automatically categorizes and separates personal and business expenses, and it also assists in calculating your tax obligations.