Learn how to file self-employed taxes properly by considering what to set aside each quarter and year, how to track deductions, and how to work with a professional bookeeper.
It’s that time of year: we’re officially in the middle of tax season. For the eager few, you may have already received your refund, but for many others, you’re already thinking about filing an extension for your self-employed taxes. If you’re in the latter group, fear not. It’s easy to learn how to file self-employed taxes as long as you stay organized and don’t skip any steps.
Many of these tips for filing self-employed taxes are best-used year-round. The earlier you start organizing your expenses and finances, the simpler it will be to pay self-employment tax each year. If you have only a few weeks or months to prepare for filing this year, check out our tax filing checklist to ensure you have everything you need.
1. Pay quarterly estimated tax
“How much will I get back?” is a common question I get from clients. If they had withholding on a W2 or made estimates throughout the year, this is a valid question. If they had income and no withholding and made no estimates, then a more likely question is “Did I set enough aside to cover my taxes?”
So what are tax estimates? If you’re self-employed, you generally need to make estimated tax payments. And it’s important to be aware of the quarterly income tax estimates you should make for both federal and—for most of you—state income tax.
Quarterly estimates are generally due on April, June, September, and January 15th. The idea is to pay about a quarter of the taxes you owe based on last year’s net income on a quarterly basis to avoid penalties.
Check your form 1040-ES for your prior year’s return for your federal income tax estimate—it may even already have the numbers filled out. However, if you made less than last year, you may want to work with a Pro to calculate a lower estimate.
2. Set aside 30% of your net earnings
A good rule of thumb is to set aside at least 30% of your net business income for income taxes if they aren’t being taken out of your pay, including self-employment tax. If you live in a state like New York or California, that number may be closer to 40%.
Even if you’re making your estimates by using the vouchers and instructions from last year’s filing, you may still owe more if your situation changes or you made more money this year.
An excellent best practice is to look at your monthly net income (revenue minus expenses) and multiply it by 30%. Put that in your separate tax savings account, and hold on to it until you file your taxes.
Check out the checklist so you can refer to it as you prepare for this tax season.
3. Save travel and meal receipts for tax deductions
You don’t have to save all of your receipts in order to get your bookkeeping finished, or even do your tax return, as long as you have bank or credit card transactions to rely on. With small business CRMs like HoneyBook, you can also track expenses easily as you go so there’s no need to hold on to paper receipts or try to keep a messy spreadsheet up to date. Be sure to keep track of all the business tax deductions you’ll be eligible to write off your taxes.
However, you do need to save receipts for meals and travel expenses over $2,500. Whenever you use your business card for a meal, be sure to write on it who you were with and what the business purpose was. Then save it in a cloud-based storage solution for easy access in case you’re ever audited.
The burden of proof is on you to prove to an auditor that the meal, travel, or expense was for business. Document your evidence. This also goes for ambiguous vendors on your statements like Amazon.
4. Properly track your mileage
If you drive for your freelancing work, you are probably entitled to a deduction. Make sure you track your mileage–you’ll need to know the total driven as well as the personal miles. If you’re into apps, consider using MileIQ to automatically log your miles.
If you prefer a more analog approach (or just like buying moleskins), then get a little one for your console and be sure to write your starting mileage, ending mileage, date, and purpose of the business trip each time you drive.
5. Consider all deductions in your tax preparation
You are entitled to legal ordinary and necessary business expenses as tax deductions. These may be meals or travel as well as equipment, software subscriptions, contractor fees, and more.
When you’re thinking about what to write off, ask yourself if it is necessary for your work. Then, keep any documentation if you think it might be a gray area and ask your tax professional.
Don’t be worried about getting audited if you’re not doing anything illegal and you have documentation. If you have a home office, make sure you take a picture of the space to have on hand just in case.
6. Establish professional bookkeeping
Bookkeeping is the foundation of any financial decision, analysis, or tax filing. If you don’t have bookkeeping in place, then you probably don’t have a reliable set of data to be making decisions and paying taxes on.
Without bookkeeping, it will also make it hard to calculate that 30% or 40% to set aside for income taxes. Good books make everything else in your financial life much easier.
Who has to file taxes on self-employed income?
If you’re wondering if all this applies to you, there’s an easy question to ask yourself: Is my self-employed income more than $400 per year? If so, you do have to file taxes on the income. Self-employed taxes will apply to nearly any business classified as a sole proprietorship. You’ll still have to pay Social Security and medicare in any scenario once you’ve passed the $400 threshold.
Make it easier to file self-employed taxes
Just because you’re self-employed, it doesn’t mean you have to do it all on your own! Investing in bookkeeping and business management software will save you time gathering the numbers you need for expenses, business income, and more.
HoneyBook is an all-in-one CRM software that lets you communicate with clients, accept online payments, track expenses, and view your year-end financial reports. It also syncs seamlessly with Quickbooks so you can manage all your financial data in one place.
Once you have a sound bookkeeping system in place, it also doesn’t hurt to hire a professional. Browse our HoneyBook Pro Accountants to find the right partner who can understand your business, help you get financially organized, and file your taxes correctly.
This article is intended for general educational purposes based on generalizations and does not replace professional accounting, investment, legal, tax, or business advice. This information is based on the IRS guidance for the 2022 tax year. You should employ a professional for advice on taxes, investments, the law, or any other business and professional matters.