More to Lose, More to Gain: Tax Tips for the Self-Employed

June 22, 2018
More to Lose, More to Gain: Tax Tips for the Self-Employed

Being your own boss is about as American as apple pie


You can make your own hours, hire and fire at will, and even exercise sole executive authority in deciding whether to re-invest annual profits or splurge on a well-deserved upgrade to the office coffee maker. You should be proud to embody the tough, true-blue, oh-so-American entrepreneurial spirit!



But don't forget taxes


That's right. While your friends might spend an hour once a year changing a few digits from their new W-2 in an online tax portal, those who boast of being self-employed get to spend entire weekends pouring over receipts, depreciation figures, insurance documents, and all of the records needed to pay your own suppliers, vendors, and staff.


Teddy Roosevelt was right when he said "the best prize that life has to offer is the chance to work hard at work worth doing," but the hassle and pitfalls of unorganized, untimely, and unprofessional tax filings can throw the best inspirational quote on its head. Being self-employed has its advantages, but if done haphazardly it can be costly. Below are a few tips to help you keep the American Dream alive.


 

Know Your Income


In an ideal world, you'll know your income. In reality, orders fall through, events get canceled, clients get cold feet, and sometimes, when Lady Luck has her eye on you, profits far outperform your growth models. You can't predict the future, but with realistic models based on past performance and current market conditions, you can come close. The reason for this is obvious--there is no worse feeling than the crippling disappointment of underestimating your self-employment income come tax time--but it's important enough to warrant its own point (see below).


 

Being your own boss is about as American as apple pie


You can make your own hours, hire and fire at will, and even exercise sole executive authority in deciding whether to re-invest annual profits or splurge on a well-deserved upgrade to the office coffee maker. You should be proud to embody the tough, true-blue, oh-so-American entrepreneurial spirit!



But don't forget taxes


That's right. While your friends might spend an hour once a year changing a few digits from their new W-2 in an online tax portal, those who boast of being self-employed get to spend entire weekends pouring over receipts, depreciation figures, insurance documents, and all of the records needed to pay your own suppliers, vendors, and staff.


Teddy Roosevelt was right when he said "the best prize that life has to offer is the chance to work hard at work worth doing," but the hassle and pitfalls of unorganized, untimely, and unprofessional tax filings can throw the best inspirational quote on its head. Being self-employed has its advantages, but if done haphazardly it can be costly. Below are a few tips to help you keep the American Dream alive.


 

Know Your Income


In an ideal world, you'll know your income. In reality, orders fall through, events get canceled, clients get cold feet, and sometimes, when Lady Luck has her eye on you, profits far outperform your growth models. You can't predict the future, but with realistic models based on past performance and current market conditions, you can come close. The reason for this is obvious--there is no worse feeling than the crippling disappointment of underestimating your self-employment income come tax time--but it's important enough to warrant its own point (see below).


 

Pay Your Quarterlies


Quarterly estimated tax payments are exactly what they sound like. Four times a year entrepreneurs estimate how much they'll make, and they write a check to Uncle Sam. The longer you're in business, the better you get at this, but there are three basic rules for quarterlies:


OVERESTIMATE, OVERESTIMATE, OVERESTIMATE!

If you can afford an extra $500 in quarterly taxes, make it. It may not sit well to give the government more money than is necessary, but trust us when we say it's worth it. We've heard the horror stories of underpaying quarterlies only to be slapped with a huge bill after better-than-expected holiday sales. Even modest quarterlies can take a load off, not only monetarily come Tax Day but also psychologically in the lead up to it. In truth, we all skip a quarterly payment now and again, and most self-employed entrepreneurs don't even estimate very well, let alone over-estimate! That said, unless you're expecting to do worse than you planned when you started this quest, you need to be generous when estimating know how much you're going to make.


 

What Can I Deduct?


The IRS defines "business expenses" as "the cost of carrying on a trade or business." This simple explanation is followed by a thousand pages of fine print, but the what's what of business deductions aren't rocket science. Usage largely determines whether or not the government will accept a write-off--is it ordinary and necessary, for instance--and for entrepreneurs, it can be difficult to cut a straight line down the middle of personal and business expenses. The IRS does offer guidelines not only for what you can deduct but also your inventory costs, capital expenses, and other common questions


 

What About a Summer Gig?


We often get asked if it's necessary to pay taxes for a summer job mowing lawns, babysitting, or tutoring. As a general rule, if you have to ask, then the answer is usually yes. Depending on how much you earn, the answer depends.


For single-filers who won't earn more than $6,350 in a single year, it's not required to file a tax return with the IRS. However, it's good practice to do so, if only to get back the money the government withheld from your check. If you're self-employed, the income limit requiring you to file is $400.


 

It can be frustrating to be self-employed, but with solid planning and good organization, it doesn't have to be. Remember that you're already doing the hardest part--running the business--and the second hardest part is already behind you--launching it. If you need a hand to guide you through the labyrinth of our tax code's legalese, Foster Financial is here to help. Contact us today to learn more about the services we offer to entrepreneurs.


Pay Your Quarterlies


Quarterly estimated tax payments are exactly what they sound like. Four times a year entrepreneurs estimate how much they'll make, and they write a check to Uncle Sam. The longer you're in business, the better you get at this, but there are three basic rules for quarterlies:


OVERESTIMATE, OVERESTIMATE, OVERESTIMATE!

If you can afford an extra $500 in quarterly taxes, make it. It may not sit well to give the government more money than is necessary, but trust us when we say it's worth it. We've heard the horror stories of underpaying quarterlies only to be slapped with a huge bill after better-than-expected holiday sales. Even modest quarterlies can take a load off, not only monetarily come Tax Day but also psychologically in the lead up to it. In truth, we all skip a quarterly payment now and again, and most self-employed entrepreneurs don't even estimate very well, let alone over-estimate! That said, unless you're expecting to do worse than you planned when you started this quest, you need to be generous when estimating know how much you're going to make.


 

What Can I Deduct?


The IRS defines "business expenses" as "the cost of carrying on a trade or business." This simple explanation is followed by a thousand pages of fine print, but the what's what of business deductions aren't rocket science. Usage largely determines whether or not the government will accept a write-off--is it ordinary and necessary, for instance--and for entrepreneurs, it can be difficult to cut a straight line down the middle of personal and business expenses. The IRS does offer guidelines not only for what you can deduct but also your inventory costs, capital expenses, and other common questions


 

What About a Summer Gig?


We often get asked if it's necessary to pay taxes for a summer job mowing lawns, babysitting, or tutoring. As a general rule, if you have to ask, then the answer is usually yes. Depending on how much you earn, the answer depends.


For single-filers who won't earn more than $6,350 in a single year, it's not required to file a tax return with the IRS. However, it's good practice to do so, if only to get back the money the government withheld from your check. If you're self-employed, the income limit requiring you to file is $400.


 

It can be frustrating to be self-employed, but with solid planning and good organization, it doesn't have to be. Remember that you're already doing the hardest part--running the business--and the second hardest part is already behind you--launching it. If you need a hand to guide you through the labyrinth of our tax code's legalese, Foster Financial is here to help. Contact us today to learn more about the services we offer to entrepreneurs.