When you’re self-employed, doing your taxes becomes a hassle and a chore. We self-employed individuals aren’t like the rest of the world, filing taxes as early as possible so we can get refunds. Most self-employed individuals don’t get refunds at all, and owing taxes is a real possibility if you’ve had a successful year or if you’ve simply planned poorly. To help out my fellow self-employed brethren, I’ve compiled a list of handy DIY tax tips for the self-employed that I’ve gathered myself and through accountants in the past several years.
Keep a Spreadsheet of Your Expenses
The most important thing I do to keep track of my self-employed tax liability is to keep a monthly spreadsheet of expenses. At the very least, you should track all of your business expenses. I actually track all of my expenses, business and personal, so I can track where every penny went and make sure I’ve got everything properly allocated. I create one spreadsheet for each month, and save them all together in a workbook that covers that tax year. I enter expenses into various categories, depending on the expense, such as “Marketing,” “Unreimbursed Expenses” and other relevant categories. Then I total up my monthly expenses on the same line of each spreadsheet (for example, this year I used a SUM formula in line 50 of each Excel spreadsheet to aggregate my monthly expenses in each category).
At the end of the year, I put together a “Year End Summary” spreadsheet that pulls data from all of the individual month spreadsheets. For example, on my year end summary, I use this Excel formula to pull data from all of my monthly spreadsheets:
“=SUM(January!A50)+(February!A50)+(March!A50)+(April!A50)+(May!A50)+(June!A50)+(July!A50)+
(August!A50)+(September!A50)+(October!A50)+(November!A50)+(December!A50)”
Just a simple SUM formula is all you need for most of your expenses, and then you have a nice aggregate page of all of your annual expenses.
I’ve found that the easiest approach is to sit down for a few minutes every month and enter all of your month’s expenses. That way you’re not stuck sitting at your computer for hours at tax time just creating a summary of your expenses. Doing a few minutes every month is much more manageable, and makes tax time much less of a chore.
Use the Appropriate Tool for the Job
Make sure you use the appropriate tool to handle your taxes. Personally, I’ve used tax preparation services (H&R Block) and tax preparation software (Turbo Tax and Tax Cut) in the past 10 years. I’ve found that Turbo Tax Home and Business is the ideal tool for me; affordable, and covers everything I need to do in a level of detail that works for me. I prefer tax prep software because then I have the leisure to compile the appropriate data at my own pace, instead of setting up an appointment with a tax prep professional only to discover that I’m missing important paperwork or relevant data. If your finances are more complex, you might be better served by working with an accountant or CPA to prepare your taxes to ensure you meet your liabilities.
It’s Your Responsibility to Report Your Income: 1099 Hunting
Some of the self-employed individuals I know erroneously believe that if they don’t get a 1099, they don’t have to report the income. Unfortunately, that’s not true, and an IRS audit could come back and haunt them for operating under this erroneous belief.
Any client who pays you more than $500 through the course of the year is required to issue you a 1099 reporting your income. Smaller clients might not be so good at keeping track, and you may have to contact them to ensure they issue your 1099. If you track your income on an ongoing basis, you’ll know if you’re missing 1099s and can easily contact the outstanding clients. Although clients have an obligation to issue you a 1099, it’s your responsibility to ensure you report all of your earnings, so you may find yourself hounding clients to get your 1099.
Making Estimated Tax Payments = Good
Estimated tax payments are a common bugaboo for many self-employed individuals. The IRS requires that you make estimated tax payments if you make over a certain dollar amount, and you can be penalized if you fail to make estimated tax payments, or if your estimated tax payments aren’t high enough. Practically speaking, this also presents a problem for you at tax time because you could find yourself owing thousands of dollars if you haven’t made enough estimated tax payments.
This is another case where it’s extremely helpful to track your income and expenses in a nice summary spreadsheet on an ongoing basis. You can check your monthly income and expenses, and make more accurate estimated tax payments every quarter. Remember: making accurate payments up front prevents you from falling behind and owing more than you can afford.
Investigate Every Possible Deduction
The world of a self-employed individual is a world of deductions. Depending on your income, expenses and operating specifics, you may be eligible to claim deductions for a portion of your rent, your mortgage payment or your utilities. You might be able to file deductions for office supplies, uniforms or a myriad of other work-related expenses. If you elect to prepare your own taxes without the aid of a professional or tax prep software, make sure you do the legwork to search out every possible deduction you might be eligible to apply. This is one case where using tax prep software or a professional really pays for itself, because these tools help you get every possible deduction and can save you hundreds or thousands of dollars.
