5 Ways to Be Compliant when Filing Self Employed Taxes

By MBO Partners | April 10, 2022


Key Points

As a self-employed professional, your estimated tax payments are due quarterly.

If the expense is both “ordinary and necessary,” it can be deducted.

If you have a home office or a space at home used exclusively for work, you can generally claim this as a home office deduction.

Life as an independent professional involves a different approach than that of a full-time employee, and the same can be said for independents come tax time. Since many independents receive payment on a 1099, tax time for independents isn’t as straightforward as simply plugging a few numbers into an online tax calculator.

Here are five ways to make sure you file your self-employed taxes compliantly—with as little headache as possible!

1. Know Your Tax Obligations

There are many advantages that come with self-employment, including being able to choose your own projects, clients, and work location. But with this freedom comes great (tax) responsibility.

Independents should plan to pay at least 30-35% of their gross income in taxes. These include: income tax (per your tax bracket) as well as both halves of Social Security and Medicare (FICA). This is also known as the self-employment (SE) tax.

If you are solely a 1099 worker, you are not responsible for paying into unemployment. However, this also means you aren’t eligible to take advantage of this benefit.

2. Remember Your Deadlines—All 4 of Them

As a self-employed professional, your estimated tax payments are due quarterly. This is both for your benefit as well as the government’s. Since taxes are not remitted from each payment made by clients to consultants, quarterly filing helps eliminate a massive tax burden at the end of the year.

Each quarter has a “hard” deadline of the 15th of the month in January, April, June, and September.

To file, you’ll generally use form 1040-ES, Estimated Tax for Individuals to calculate and pay these taxes. This form contains blank vouchers you can use to mail in payments, or you can make payments online using the Electronic Federal Tax Payment System (EFTPS).

If your business satisfies certain criteria, you can save time, reduce paperwork, and limit issues using the Schedule C-EZ form. You can use this form if you have a profit from your business and:

  • Your expenses are not greater than $5,000,
  • You have no employees,
  • You have no inventory, and
  • You are not using depreciation or deducting the cost of your home.

3. Understand Your Deductions

The IRS makes it easy to deduct qualified business expenses. If the expense is both “ordinary and necessary,” it can be deducted. Deductions include expenses that are:

  • Common or accepted in your industry
  • Helpful and appropriate for your trade or business
  • Office equipment including programs, applications, and software
  • Certain travel costs
  • Retirement savings

If you have a home office or a space at home used exclusively for work, you can generally claim this as a home office deduction. Travel costs from a home office to a client site can also be an eligible work expense deduction.

The important thing here is to document, document, document. Be sure to keep records of all of your business spending and expenses in case of an audit. Save those receipts—including gas—and written records of payment. Pictures are helpful as well, especially ones of your home office as this deduction may be viewed with more scrutiny. Make sure your listed expenses contain precise, exact figures to avoid raising red flags.

4. Beware of Double Taxation

We understand many self-employed professionals spend most, if not all of their workday at home. For those in this category, be aware of the telecommuting tax penalty—if you work outside your client’s state, you could be taxed by both their state as well as your state of residence.

Legislative changes are being made to avoid this problem, but not all states have resolved this issue. We suggest consulting with a tax advisor to ensure your compliance is up-to-date with your state legislature.

5. Determine Your Business Entity

Before any of the items above apply, it’s important and required to determine your business entity.

  • Sole Proprietors are self-employed and work alone
  • Partnerships are two or more Sole Proprietors sharing ownership of a business
  • S-Corporations and C-Corporations are for those who prefer to incorporate their business

Your business entity will depend on the size of your business as well as its annual projected profit. Making this decision can be difficult, so it’s important to put in the proper research and consult an accountant if possible.

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.

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