8 Tax Tips For The Self Employed

2015 represented a new high in what is being called “the gig economy”. What’s a gig economy? It’s an economy that’s dominated by people taking on more temporary jobs, and organizations hiring more independent contractors for short-term “gigs”.

The trend has been on the rise in the last few years, with a recent study predicting that in the next five years, almost half of American workers will be independent contractors. 

Are you part of this new phenomenon? If you are self-employed then you need to understand that with your freedom comes big responsibilities in terms of your taxes.

Some self-employed individuals are sole proprietors and some are independent contractors, but both need to assume the role that employers previously filled in terms of making sure that the government gets its due. 

Here are some of the most important things that self-employed taxpayers need to know:

1. Self-employment income is not limited to the money that is earned by an independent full-time business. If you have a regular full-time job but are also providing work on the side as an independent contractor, then you must account for this income as self-employment income.

2. Self-employed individuals are required to submit their taxes on specific forms, usually the Schedule C or the Schedule C-EZ.  These are to be filed along with the standard 1040.

If your business expenses total less than $5,000 and you meet other specific criteria then you can use the simpler C-EZ Net Profit from Business form; otherwise you need to use the Schedule C, Profit or Loss from Business.

3. If you made a profit in your business, then you not only have to pay self-employment tax, but also income tax.  Self-employment taxes are specifically geared to making sure that you are paying your fair share into the Social Security system and the Medicare system.

4. The government is intent on receiving the money that it is owed on a regular basis, and since self-employed individuals don’t have employers taking out payroll taxes on their behalf, they are required to submit quarterly estimated income taxes.

There is a set schedule that the government establishes for submitting these taxes, and a specific set of guidelines for how to calculate the amount that you send in each quarter. Failure to submit the appropriate amount on a timely basis can result in fines and penalties.

5. If you use your home as the base of your business, you may be able to deduct some of your home expenses as a business expense. There is a standard deduction that can be taken, or you can calculate your deduction based upon the portion of your home that you use and your actual expenses.

Meticulous record-keeping is recommended for those who choose to calculate the expenses on their own.

6. There are certain expenses that are considered ordinary and necessary to specific businesses, and these are generally allowable deductions.  Many of these expenses are industry specific or clearly needed in order to help you conduct your business.

7. One of the most beneficial tax deductions available to self-employed individuals is a retirement plan. The 401K is a specific type of plan available to self-employed individuals who have no employees, while the SEP IRA is an excellent option for those who are self-employed and who do have employees.

8. Determining when the best time is to take a deduction is dependent upon a number of factors. Many businesses choose to take their deductions in the same year that an expense was incurred, but there are some costs that need to be capitalized and the deductions taken over a period of several years.

This list just scratches the surface of the tax factors impacting the self-employed.

Questions about your self employment taxes? Call us at (407) 680-0900 to discuss your situation.