Tax season is upon us, and if you run a small business or work for yourself, it's time to get serious about getting your filing in order. When you're self-employed, the tax process becomes a little more involved--you have tax considerations, forms and deadlines that your friends in the traditional 9-to-5 don't have. In fact, in a recent study of on-demand providers, 20 percent of those surveyed said that "understanding tax and legal obligations" was one of the biggest challenges in working in the on-demand economy.
The good news is that it doesn't have to be intimidating. If you're informed and organized, self-employment tax filing can be done so quickly and easily that you can get back to focusing your energy on what's really important--operating your small business.
Here are seven tips to help you navigate your tax situation so you can take control of your finances in 2017:
1. Know your employment status
When it comes to taxes, being considered "self-employed" doesn't mean you must have all the traditional trappings of business or have an independent source of income as your primary earnings. Someone who works a regular job but makes hand-crafted jewelry on the weekends to sell on Etsy is self-employed, for example. If you make money from a hobby or side job, or even barter your services, that income must be reported on your tax return.
2. Do your research
Before you begin, get up-to-speed on some basic information, including:
- Your total income from self-employment sources in 2016
- A list of deductions (expenses) that you're allowed to take
- Whether you have customers who owe you money
- The deadline on your tax filing and any specific filing instructions
If you made $400 or more in self-employment income (after expenses) in 2016, you have to file your taxes. But even if your expenses put you below that $400 threshold, you may still have to file tax paperwork if you meet other filing requirements.
3. Collect all documentation
Record-keeping is critical when you're self-employed, not only to determine how well your business is performing throughout the year, but to streamline the filing process. Key documents to collect include:
- 1099-Misc forms that any clients have sent you for 2016 (these should have been sent out by January 31)
- 1099-K forms if you were paid by a third party provider like PayPal (sent if transactions exceed 200 or gross payments exceed $20,000)
- Receipts for your tax deductible business expenses
- If you work from home, home office square footage, mortgage or rent bills, utility bills, and other expenses related to the home office deduction
4. Understand your income and the forms required
Self-employment income is usually declared on a form called Schedule C, Profit or Loss from Business. If your business earnings are very simple, they will be reported on a Schedule C-EZ. Schedule C relates to profit or loss from a "business or service," which can include everything from babysitting neighborhood kids to working as a full-time marketing consultant. Even if the job is simple, you're entitled to take deductions against that income, which are declared on Schedule C. If your net income after expenses exceeds $400, your self-employment taxes will be reported on Schedule SE. All of these forms get filed with your Form 1040 on the tax deadline which is April 18th this year.
5. Tally up your work-related purchases
A myriad of business expenses are allowed to be deducted by the IRS. Did you buy a new computer or printer for your business? Perhaps you took a class in your field of work? The IRS even allows a standard mileage deduction for every mile you drive directly related to your business activities, such as meeting a client for lunch. For 2016 the standard mileage rate is 54 cents a mile. Keep track of these expenses throughout the year and count them at tax time, as they will dramatically lower your overall tax bill.
6. Determine if you owe estimated taxes
Regular employees file an annual tax return once a year, but many self-employed individuals have to do extra legwork in the form of paying estimated taxes, generally once each quarter. Why? Traditional employees have a portion of their pay withheld for taxes each time they get a paycheck. The IRS wants the same money up front from self-employed individuals, but since you don't get a traditional paycheck, you have to estimate your annual earnings throughout the year and pay quarterly estimated taxes. Estimated taxes apply if you expect a tax bill of $1,000 or more this year.
7. Take advantage of tax-time tools
Just because you work on your own doesn't mean you have to tackle taxes by yourself. Once you have all your information collected and in one place, leverage technology to help you turn your records into an accurately filed tax return and tax savings for your business. For example, TurboTax Self-Employed asks you simple questions during the filing process and gives you the tax deductions and credits you're eligible for based on your answers. It can also help you separate, organize, categorize, and uncover expenses you didn't know existed. And throughout the year, QuickBooks Self-Employed can help you track your business income and expenses so you can easily estimate those quarterly tax payments and file your taxes at tax-time.
Whether you're self-employed full-time or just making some extra cash as part of the rapidly growing on-demand economy, there's already a lot to manage when you are your own boss. If you're informed about the process, diligent about record-keeping, and make smart use of the tools available to you, you'll find that the tax filing process is actually quite manageable.