Tax Pitfalls for Self-Employed Individuals
Being your own boss can be incredibly rewarding, but it also comes with a lot of responsibility. When something goes wrong, there’s only the boss — that’s you! — to blame. One aspect of self-employment that can trip you up is doing your taxes. If you’re new to self-employment, you may want to save money by doing your own taxes. However, making a mistake when it comes to your filing can cost you — in some cases, a lot more than using a professional tax preparer might have.
Estimated taxes are one common mistake that self-employed individuals make when it comes to taxes. As a self-employed person, you typically have to pay quarterly estimated taxes. These taxes have to be paid throughout the year, in the same way that an employer withholds taxes from employees’ paychecks and remits them to the IRS. If you don’t pay enough in your estimated payments, you could face a penalty.
According to the IRS, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. You’ll also face penalties for late quarterly payments, even if you get a refund on your tax return.
Other errors that small business owners make include not dealing with depositing their taxes correctly. If you have employees, you must deposit the taxes you’ve withheld, and your share of those taxes as the employer, using electronic fund transfers. If those taxes are not deposited correctly and on time, the business owner may be charged a penalty.
Another big mistake for self-employed people and small business owners is not keeping your expenses separate. Setting up a bookkeeping system that keeps your personal expenses out of the mix will be a big help when it comes to figuring out your taxes. The IRS notes that while it can be tempting to use one credit card for all expenses, especially if the business is a sole proprietorship, this can cause accounting headaches.
It’s also essential to get familiar with the deductions you can make as a self-employed person. These deductions include your home office, your self-employment tax, retirement plan contributions, health insurance premiums, and vehicle use. There’s also the qualified business income (QBI) deduction, which many sole proprietor businesses may be eligible for.
Talk to an Expert
It’s a lot to become familiar with. If you are new to being self-employed, or you’re not sure you’ve got a handle on taxes, even after a few years of being your own boss, bringing in a professional could pay for itself. A financial advisor or tax expert can help you file correctly, identify deductions you may have missed, and build a tax strategy that works year-round instead of scrambling every April.
They can also help you legally reduce what you owe by timing income, maximizing deductions, and taking advantage of tax-deferred accounts that fit your situation. If you’re looking for help, platforms like Advisor.com can connect you with a financial professional who can tailor a strategy to your goals.
