If you're self-employed, often it makes the most sense to do your taxes yourself. I was recently a guest on, Aiden Kramer's youtube channel, "All Up In Yo Business," where I covered the 5 Tax Tips For Doing Your Own Business Taxes.
Aiden is a lawyer in Colorado and her youtube channel provides educational law videos for small business owners, which you can check out more HERE.
You can watch the interview and read the blog post below. I hope you enjoy and please comment, at the bottom of this blog post, if you have any questions.
If you're wondering if your business is self-employed, generally, if you work for yourself and you didn't form a separate business entity with a state, then your self-employed. The LLC (with only one owner/member) is the one exception to this rule, and also qualifies as self-employed.
#1 Understand Your Business Tax Form...
NONE! Unlike other business, like a partnership, multi-member LLC or corporation, your self-employed business not have to file it's own business tax return.
Instead, when you're self-employed, your business taxes are filed with your personal taxes (Form 1040), reporting your self-employed income and expenses on a Schedule C for Sole Proprietors.
You can’t file your business and personal taxes separately; they must be filed at the same time.
If you didn’t know and you filed your personal taxes without your business information, you can amend your tax return (which you are required to do by the IRS). I would especially recommend amending, if people you worked for gave you form 1099, reporting the amount they paid you. I’ll tell you the best software to do this with, in the last tip.
#2 Understand What Your Tax Write-Offs Are...
For taxes, a write-off is an amount you spent (a cost to you) that you're able to deduct from income before taxes are calculated. So, there are personal tax write-offs and business tax write-offs. When we're talking about business write-offs, there are some terms that are used interchangeably, such as write-off, business expense, cost or deduction. These all generally mean the same thing for business taxes.
Your business expenses, are write offs, and that means any cost that you spend to run your business, is qualified to be written off before taxes. The IRS definition of self-employed business write-offs says they must simply be ORDINARY and NECESSARY, which means that they're common & accepted for your industry and helpful & appropriate for your type of work. Write-offs don't need to be 'required' to be written off, but they cannot be personal expenses (which are never deductible).
There are a few write-offs that are primarily personal expenses that you are able to take a write-off for a portion of the cost related to business. These tend to be a more complicated calculation and require additional documentation, such as the Home Office, Meals & Entertainment and Vehicle Expenses.
A lot of times people will tell me that they don’t have a lot of expenses and that’s why they don’t keep records. In this situation, people usually end up having a lot more qualified write-offs, when they begin tracking them.
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#3 Open A Separate Business Bank Account
Having a separate bank account, is not only required legally for LLCs, but is so helpful for doing your taxes. If you use your business bank account to put all payments in and pay all expenses out of, then you can easily see all of the transactions in your business in one spot.
Often people tell me that they aren’t making that much money yet and it would be more difficult to have a separate bank account. If your goal is to grow your business and earn more money, getting things setup, right, now; is only going to make it easier to stay organized as you grow and be able to earn more money.
If you're concerned about it being a pain, try and open a business account at the same bank you have your personal bank account. Often, your able to easily transfer funds between the accounts online.
#4 Maintain A 'Complete Accounting Record'
Yup, this is required for taxes, as well as other legal and business requirements. An accounting record is simply a complete record of all your business income and expenses.
You can use a spreadsheet, but there's also great online software recommendations that sink with your business bank account to automatically record transactions from your bank account. Setting up records to be automated like this, can be a huge time save. However, the most important thing is that you choose something you actually maintain regularly.
The other big tax requirement, is tracking the business purpose of every expense. All this means, is noting how the cost is business related. This is also great business practice as you grow your business and hire people to work for you.
You can enter the business purpose into your accounting software, but I recommend just jotting it down on your receipts and be sure to file your receipts in a system (hopefully to never return to again!).
My favorite software for automating self-employed and small business records is Xero, Quickbooks for Self-Employed (looks great, haven't tried this version, yet!) and a free (less inclusive) option is Wave Accounting software.
#5 Use online DIY Tax Software for filing your taxes, yourself.
You can paper file your taxes but I don’t recommend that because it’s time consuming and you’re more likely to make a mistake or miss out on deduction. If you do an online search for “IRS DIY tax software” the IRS has a listing that guides you to find the cheapest option, based on your income and state.
Personally, the best online based software are the online based programs, where you create an account and then the software asks you questions like an ‘interview’. You don’t have to fill out the forms yourself, but instead you simply answer the questions and enter your total types of business income and expenses when asked. You enter exactly what's on any tax forms you receive, directly into the software, such as a W-2, 1099-INT, and/or 1099-MISC. At the end, you can easily E-file your taxes and enter your bank account to have your refund directly deposited or payment made. The largest example which most people have probably heard of is TurboTax.
My favorite DIY tax software is www.freetaxusa.com. I’m not an affiliate for them, yet, but I plan to be because I recommend them all the time. Your federal return is free and it costs (right now) $12.95 to file your state return. I found them to be the easiest to navigate and they're also the simplest and cheapest if you need to file an amended return.