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Self-Employed? How to Conquer Tax Season Like a Boss

5-minute read

Emily Thompson

Emily Thompson

19 December 2019

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There are two things that are certain in life—death and taxes. And, I refuse to let tax season kill me.

I’m not just being dramatic here. As someone who is self-employed, tax season stresses me out. Days before the deadline, I used to scramble to gather expenses. I had anxiety, wondering if I had deducted my home office correctly. And I wandered around the house, looking for items that could be considered, “office supplies.”

Then my worst nightmare happened.

The IRS sent me a letter, requesting an exorbitant amount of money. Thankfully, it was a simple error on their end. But the experience taught me I had hit rock bottom. It was time to take control of my accounting, instead of letting it control me.

After talking to other business owners, a life-saving accountant, and doing research on my own, I discovered a few ways to make tax season easier.

6 Self-Employed Tax Tips that Helped Me Stay Sane.

  1. Keep up with quarterly payments.

    When you’re self-employed, it can be tough to know how much money you’ll make ahead of time. But if you do your best to estimate taxes on a quarterly basis, you’ll probably pay less at the end of the year. The best part? If you overpay, the IRS will send you a refund.

    To me, a nice check always feels better than a big bill.

    So if you’re a freelancer, contractor, or have any side hustle, listen up. According to the IRS, you should pay quarterly taxes if you expect to owe at least $1,000 in federal income taxes this year. The due dates for 2020 tax payments are:

    • January 25, 2020 - 4th quarter 2019 estimated taxes
    • April 15 2020 - 2019 individual returns AND 1st quarter 2020 estimated taxes
    • June 15, 2020 - 2nd quarter 2020 estimated taxes
    • September 15, 2020 – 3rd quarter 2020 estimated taxes
    • January 15, 2021 – 4th quarter 2020 estimated taxes

    You can calculate your quarterly estimated tax using a 1040-ES form —or hire an accountant to help (that’s what I do). There are a couple ways to estimate your taxes, but if you have a fairly consistent income, send in one-fourth of what you think you’ll owe for the entire year. Then pay it online.

  2. Become a bookkeeping whiz (or get someone to do it for you).

    I was terrible at bookkeeping until I bought accounting software. Now it’s easy. Every week I keep up with invoices, expenses, and file away receipts. No longer am I scrambling to find old statements to support expenses from months ago.

    I use a tool called Freshbooks (it’s just $15/month), but there are a ton of solutions on the market, like:

    • Quickbooks
    • Xero
    • Zoho Books
    • SageOne

    Ultimately, find software that makes you happy. If you think you need more support, consider hiring a bookkeeper. To keep costs down, look for a freelancer on LinkedIn or Upwork who can help you on an hourly basis or at a monthly flat rate.

  3. Aim to get every business deduction possible.

    You probably already know the IRS lets you subtract deductions from your total income to help reduce the amount you owe in self-employed taxes. You can either take a standard deduction or itemized deductions.

    Standard deduction: This is a set amount that the IRS lets you deduct. It varies based on your filing status. Taking the standard deduction is usually easier, faster, and requires less paperwork.

    Itemized deductions: You can use a Schedule A of Form 1040 to itemize your deductions. You might want to do this if your total itemized deductions are greater than the standard deduction. Now that I work with an accountant, this is the route I go. It’s different for everyone, but for me, itemizing deductions helps me lower my tax bill.

    If you keep good records of expenses, you can deduct:

    • Utility bills, such as your Internet and phone bill.
    • Business-related meals
    • Business travel expenses, including gas mileage, parking, flights, and public transportation tickets.
    • Education for your field, including classes and conferences
    • Rent on office space
    • Advertising, including website hosting, mailers, and Google and Facebook ads.
    • Health insurance premiums.

    If you have questions about what to deduct—or how—talk to an accountant. Some deductions can be tricky, like the home office deduction. Be prepared to back up your deduction with details about your workspace. You never know when the IRS might ask questions.

  4. Set aside tax payments ahead of time.

    When you’re self-employed, it’s easy to get deceived about how much money you actually make. When you receive a payment from a customer, remember, you still have to pay taxes on that amount. Don’t get caught at the quarter’s end without enough money to pay the IRS.

    My accountant recommended opening up a separate savings account just to pay taxes. When a client pays me, I would automatically move a portion of that payment into my savings account. This way, I ensure I always have enough funds.

    Full disclosure: I haven’t tried this yet, but I think it’s a fantastic idea. Instead, I always make sure I have enough in my bank account to cover taxes. I also set my pricing with tax payments and other expenses in mind.

  5. Run a business, not a hobby.

    A lot of people enjoy making baked goods, selling crafts, and doing other hobbies that generate income. But it’s important to distinguish what’s a hobby versus what’s a business, at least according to the IRS.

    The IRS uses these 9 factors to determine if you have a hobby or a business:

    • Whether or not you operate in a businesslike manner, and maintain books and records.
    • The time you put into your activity to make it profitable.
    • Whether or not you depend on the income for your livelihood.
    • If losses are out of your control or are normal costs associated with a business startup.
    • Whether or not you pivot to become more profitable.
    • If you or your advisors have the knowledge to make the activity a successful business.
    • If your activity makes a profit, and if so, how much.
    • Whether you expect to make a profit from the appreciation of the assets used in the activity.

    Look, it’s not black and white. But the bottom line is if you’re running your business like a true business owner and seeing some success, congratulations, you have a business. This means all business expenses and losses are fully deductible. For a hobby, you can only deduct expenses up to the amount of income you earn.

  6. Talk to an accountant.

    For me, hiring an accountant is worth the cost. Depending on where you live, you can expect to pay between $200 and $400 for tax preparation services. If you have an in-depth meeting, you might pay between $50 and $150 each visit. An accountant can recommend expenses to deduct and help you set up your business to maximize savings.

    For me, working with an accountant offers peace of mind and frees up time. But if you can’t or don’t want to hire one, there are plenty of tax preparation software solutions. In the meantime, keep growing your business, learn as much as you can about taxes, and of course, keep paying Uncle Sam what’s due.

Do you work for yourself? Share some of your self-employed tax tips with our community - we’d love to hear from you!

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Emily Thompson

Written by

Emily Thompson

I earned a B.A. in Journalism from the University of Wisconsin at Madison (go Bucky). After realizing my first job might involve carrying a police scanner at 2 am in pursuit of “newsworthy” crimes, I decided I was better suited for freelance blogging and marketing writing. Since 2010, I’ve owned my freelance writing business, EST Creative. When I’m not penning, doodling ideas, or chatting with clients, you’ll find me hiking with my husband, baby boy, and 2 mischievous mutts.

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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