A Beginner’s Guide to Taxes for Solopreneurs and Freelancers
Being your own boss has certain benefits. You can work at your own pace without someone monitoring your hours and performance. It gives you a lot of freedom to do whatever you want to explore and probably one reason why many people are becoming solopreneurs nowadays.
But running a business on your own is no bed of roses, whether you’re a freelance writer, solo jewelry designer, or whatever you’re working on. It comes with its share of challenges and added responsibilities, such as accounting for your own Solopreneur taxes. When you were working for someone else, you only handed over your tax form to the in-charge.
Filing your taxes as a solopreneur requires much more than that. Thus, you must have an accurate understanding of your obligation as a taxpaying entity. Read on and equip yourself with this guide to help you prepare for tax season.
Keep Accurate Financial Records
Handling business taxes is one of your biggest responsibilities as a solopreneur. You have to know which forms to use, when taxes are due, how much you should be paying, and many other things. But before you get started with tax-related activities, you have to juggle several accounting tasks.
It’s important to note that successful tax filing begins long before tax season. Meaning, you have to prepare everything related to your taxes the whole year-round. That’s why you need to keep accurate financial records and update them as necessary. Remember that how well you maintain them is essential to meeting your tax obligations.
Year End Profit & Loss Statement
When it comes to your financial statements, a profit and loss statement (P & L) is the first thing you need to develop. Basically, it’s a summary of the revenues, costs, and expenses generated in a certain period. You can look for profit and loss statement templates online or through spreadsheet programs.
The reason why you have to prepare a P & L statement is to monitor your business operations, either quarterly or monthly. But besides that, it is the only financial statement required by the Internal Revenue Service (IRS). It is also used to assess taxes regarding the profits your business has earned.
Keeping a record of your business financial transactions can be much more complicated than you think. But you don’t have to do it on your own. There is accounting software that you can use to streamline and automate the accounting process, or you can get help from a bookkeeper or accountant.
Understand Your Tax Obligations
Business tax implications depend on the legal structure of your business. If you’re a solopreneur, you’ve most likely registered under sole proprietorship. It is the easiest and cheapest business structure, but then again, you’re accountable for all financial and legal obligations.
As a solopreneur, you may be liable to file and settle the following taxes:
Quarterly Estimated Tax Payments
If you are self-employed, you must also pay quarterly estimated taxes. Failing to do so may result in penalties and interest. To figure your estimated taxes, you may refer to the IRS’s Form 1040-ES, which they issue every year. It provides detailed information about how to calculate your estimated quarterly tax payments.
You may also use your income, deductions, and credits for the previous year as a guide. Note that it requires discipline to stay current with your estimated tax payments. Thus, make it a habit to plot out the due dates and send payments on time.
Every business is required to file an income tax return every year. But a sole proprietorship is part of pass-through entities, which means your business pays tax based on your personal income.
As a solopreneur, you are required to pay federal income tax, which depends on your filing status and annual earnings. You can check out the IRS’s webpage to know the current rate brackets of federal income tax. In addition, most states also collect state income tax. It would be best to equip yourself with local requirements to get a better grasp on your taxes.
If you’re earning $400 or more as a solopreneur, you may be subject to self-employment tax. The current rate for a self-employment tax rate is 15.3%. As per the IRS guidelines, 12.4% goes to social security while 2.9% towards Medicare. To further figure the amount of your self-employment tax, use the Schedule SE (Form 1040).
If you are selling products that may be required to collect and remit sales tax you will have to set up a system for this. It is important to realize that sales tax is never an expense to your business you are simply the intermediary who collects from the customer and then remits to the state taxing authority. This can be a complicated task and we recommend that you consult with a sales tax specialist such as Taxjar.
S-Corp Election To Reduce Taxes
As a solopreneur it is important to be aware of how legally structuring your business can drastically effect how much in income taxes you pay. If your profitability is over $50,000, we recommend that you do an analysis of the cost and benefits of converting to an S-Corp. Head to our S-Corp Calculator to begin this analysis.
Know The Different Tax Deductible Items
Another advantage of solopreneurship is you can write off many business and daily expenses. If you want to save money on your taxes, you should not miss any of them. Thus, get yourself familiar with the different tax deductions available for self-employed individuals. We’ve highlighted some of them below.
Self Employment Tax
Employers and employees share the self-employment tax. But as a solopreneur, you are paying the entire portion. But the good news is you can detect half of your self-employment from your net income. In effect, your income tax will be less.
Internet & Cell Phone
Whether you claim the home office deduction or not, you can deduct internet and phone bills. But only if you use them to conduct business, such as making business calls, posting social media promotions, sending business emails, and many others.
Any expenses related to business travel may also be deducted from your taxes. It can be the cost of airfare, accommodations, parking, fuel, and the like. But your business travel must last longer than an ordinary workday. You may refer to the IRS’s websites to know further about deductible travel expenses.
You can also write-off any cost for education that helps you conduct business. It can be a night class at the local college or online certification. If you purchase any books, journals, and subscriptions related to your industry, you can also deduct them from your taxes.
The home office is one of the most complex and valuable deductibles. You can deduct the cost of any workspace you use, regardless of whether you rent or own it. You can also claim expenses related to your home, such as mortgage interest, repairs, and utilities.
But the rule is, your home office needs to occupy at least 20% of your house and be your regular place of business. It would be best to get some property tax advice to help guide you further on this matter. They know a lot better when it comes to handling and saving taxes.
There are plenty of ways to save money on your taxes. The key is to be proactive and consistent in keeping all your financial records. Make sure to keep hold of all your receipts as they will serve as evidence of what you are claiming. Moreover, don’t hesitate to seek help from professionals if you need assistance to file and manage your taxes.
Lauren Cordell writes on various financial and business websites. Most of her writings focus on helping small business owners and entrepreneurs manage their finances effectively. She tackles topics on accounting, insurance, taxes, economics, and anything that will educate the business-minded ones.