Unique Tax Challenges for the Self Employed
Being self-employed is difficult when it comes to taxes. Every freelance, part-time, and contract- worker needs to pay taxes. But, being self-employed has unique tax challenges. Everything from deductions to business expenses, record-keeping, and more needs to be accounted for.
At The Firm ALP, we understand that being your own boss is tricky come tax time. Unlike standard employees, owners have their own set of tax rules. Given all these unique challenges, we’ve outlined a few of them to look out for below.
Your business structure matters when it comes to taxes. That’s because how you designate your business has a major impact on your taxable income and your personal tax return.
When it comes to a sole proprietorship, business income and expenses need to be reported on your Schedule C (Form 1040 or 1040-SR). Self-employment taxes (like Social Security and Medicare) are also your responsibility. But when it comes to partnerships, you will need to file them as one or as a corporation. Partnerships also file information returns but don’t pay federal income tax.
Keep in mind that are major differences when it comes to C-corporations. These are recognized as separate tax-paying entities. Meaning, they will be able to take special deductions. It also means that any profit earned is taxed at a corporate level and then again on the recipient’s tax return (if it’s distributed as a dividend to shareholders.)
Lastly, if you have an S-corporation, you must claim income on your personal tax return. But this designation gives you the ability to choose a salary, which may be reported on a W-2 form at the end of the year. So, whether it’s a sole proprietorship, an LLC, a partnership, an S-corporation, or a C-corporation you will need to know the rules as they pertain to your entity to file accordingly.
There are a number of self-employed taxes and deductions you should be aware of. These change (depending on where you live, legislature, etc.) which is why it’s necessary to keep up to date on them. Otherwise, your quarterly estimated tax payments could be off.
The Tax Cuts and Jobs Act of 2018 were one of the most recent and notable changes to tax deductions for the self-employed. Although these regulations are set to expire in 2025, certain deductions are no longer permissible. Things like entertainment, parking, mass transit, etc. have all been eliminated.
Knowing what you can deduct each year can make your business as profitable as possible. To ensure you qualify, we recommend working with a professional accountant or financial advisor, like us. We will look into your expenses, review them, and ensure you qualify for the deductions.
Things like self-employment tax (Medicare and Social Security taxes), your home office, the internet, phone bill, health insurance, meals, travel, and more could save you if eligible.
Timing and Estimating
Having a solid understanding of what earnings you have coming in vs. what expenses you have is essential for planning the trajectory of the business.
As an owner, you are expected to pay quarterly taxes. This number will be the amount owed in taxes per quarter. To get an estimate, take your tax liability of the previous year and divide it by four.
But, before you go calculate this number on your own, consider speaking with a professional. That’s because getting to this number can be difficult. Many owners fail to keep track of their expenses or don’t automate booking systems which often results in skewed numbers. Speaking with a professional allows you to dedicate time to your bookkeeping. In turn, identifies where you stand tax-wise for the year.
Ultimately, filing taxes is a daunting task. However, with proper bookkeeping, research, and effort you can overcome any tax challenges that come your way.