Four Tax Tips for the Self-Employed

Self-employment gives you a rare opportunity to be your own boss. You work when you want to, take vacation when you want to, and in general enjoy a greater degree of independence. But with that freedom comes more responsibility, especially where taxes are concerned.

Self-employed individuals typically have to pay their own FICA taxes, self-manage their retirement plans, and in general manage their tax situation themselves. Here are four tips that will enable you to make wise decisions where taxes are concerned. Of course, the best course of action is to hire a qualified accountant with experience in these matters – so please call me today if you’d like to learn more!

Tip No. 1: Understand how self-employment tax is calculated

You must pay self-employment taxes on self-employed income. If you file a schedule C (as a statutory employee, independent contractor, or sole proprietor) the net profit listed must be included on Schedule SE, which you file with your form 1040. Schedule SE is used to calculate and report the amount of self-employment tax owed.

Tip No. 2: Take advantage of business deductions to reduce taxable income

Make sure you take advantage of any business deductions you are entitled to, such as rent, home office expenses, equipment purchases, and utilities. To be deductible, a business expense must be both normal for your type of self-employment (for example, a computer for a graphic designer) and necessary for you to earn a living. If any expense is incurred only partly for business purposes, you can only deduct the business-relevant portion.

Tip No. 3: Establish a self-employed retirement plan

As a self-employed individual, you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans. For example, you can create a Simplified Employee Pension (SEP) plan where you can make pre-tax contributions. These funds, as well as any earnings, aren’t taxable until they are withdrawn. You can also set up a 401(k) plan that supports pre-tax and / or after-tax (i.e., Roth contributions). Roth contribution plans have no immediate tax benefit because you contribute after-tax amounts, but qualified distributions made in the future will not be taxed.

Tip No. 4: Avoid penalties by making your tax payments on time

Because you are self-employed, you have to make your own quarterly federal income and self-employment tax payments using IRS Form 1040-ES. (Florida does not require you to pay state taxes.) If you don’t make these payments, you may be hit with a huge tax bill at the end of the year, along with penalties and interest.

If you have employees, you’ll have additional tax responsibilities, such as paying federal employment taxes. IRS Publication 15 (Employer’s Tax Guide) has additional details.

Please contact me today if you’d like to learn more!

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Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.