If you have a regular W-2 job, filing your taxes may be an annoying annual task, but nothing more. In fact, with programs like Turbo Tax and TaxSlayer, filing can be easy. You enter your income and let the program guide you through the steps to determine if you’re eligible for any deductions.
But when you’re self-employed, taxes take on a whole other level of complication (ahem, the ever confusing home office deduction). And with a few key changes from the recent tax reform, there are some new things to keep in mind when filing this April.
Here’s every tax rule and tip you should be aware of if you’re self-employed.
1. Taxes aren’t taken out of your pay, but you still have to pay them
When you’re a regular employee, your company takes tax out of every paycheck to pay your federal income tax, Medicaid, and Social Security. But when you’re self-employed, a $200 project amounts to a $200 check, which is great until you realize you’ll still have to pay taxes on that $200.
You’re responsible for putting aside money to pay income tax and, if you made $400 or more in 2018, the 15.3 percent self-employed tax that covers Medicare and Social Security.
Most tax experts suggest setting aside 25 to 30 percent of what you earn to pay taxes. It may seem steep, but it will ensure you don’t close out the year with a big tax bill and not enough money to pay it.
2. You have to pay your taxes quarterly
Most people don’t think about taxes until the beginning of the year, but when you’re self-employed, you don’t have that luxury. When you’re self-employed you have to pay quarterly estimated tax payments throughout the year. They’re called “estimated” tax payments because you’re looking at your income and literally estimating what you owe the IRS.
For 2019, the due dates are April 15, June 17, Sept. 16, plus Jan. 15 of 2020. Tax programs like Quickbooks can help you estimate how much you’ll owe in quarterly taxes and allows you to pay them via their site. If you want to go at it alone, the IRS has instructions for quarterly payments and you can pay the quarterly fees using the 1040-ES form.
3. Tracking your income and expenses is a must
Even though you’ll get 1099 forms come tax season, you still need to know how much money you’re making throughout the year (so you can estimate your quarterly payments) and how much you’re spending on work-related expenses.
4. You should open a separate bank account and credit card for work
When you mix personal and work expenses things can get confusing come April. It’s much easier to open a work bank account and credit card so you can easily see what you made and spent in regard to work.
5. You’ll need to decide whether to choose the standard deduction or itemize your deductions
These deduction options are given to every taxpayer, not just those who are self-employed. You must decide whether you’ll take the standard deduction or itemize your deductions–you can’t do both. Typically unless you’re a homeowner or have unusually high deductions, you’ll opt for the easier, flat standard deduction of $12,000 for a single taxpayer and $24,000 for those married and filing jointly.
6. You can take the new 20 percent business deduction
New to the 2018 tax year is a 20 percent tax break for businesses. As long as you earned less than $157,500 and own your own business (this includes working for yourself), you’re eligible for this deduction. The 20 percent deduction is based on your net income, so if you earned $50,000 in 2018, you could get a $10,000 deduction.
7. You can deduct your home office
If you have a home office in your house or apartment that you use exclusively for work, you can also deduct your home office when filing your taxes. There are two ways to calculate your deduction. You can figure out the square footage of your home and then determine what percentage of your home is taken up by your home office. For example, if your home office takes up 15 percent of your home, you can write off 15 percent of your rent or mortgage and 15 percent of home office expenses like mortgage interest, utilities, repairs, and depreciation.
If you have no idea how to calculate things like depreciation, there’s a simpler way. Figure out the square footage of your home office and multiply that by $5. So if your home office is 200 square feet, you can write off an easy $1,000 when filing your taxes.