By Rieva Lesonsky, CEO of GrowBiz Media & SmallBizDaily.com
Tax season is almost here, and if you’re self-employed, paying your income taxes can be fraught with risks. If you’re calculating your taxes yourself (on top of all the other duties of running your business), it’s easy to make errors. To be more precise, of the 36% of self-employed workers have been audited by the IRS, almost 1 in 3 had errors on their taxes, according to a 2018 QuickBooks survey.
The 2018 tax reform laws add even more uncertainty into the mix. While it remains to be seen how these changes have affected self-employed people, there are some things you can do to protect yourself. Here are six of the most common tax mistakes self-employed workers make, and how to avoid them.
Mistake No. 1: Fudging your 1099s
Are you accurately reporting income earned from customers and clients? It’s your responsibility to make sure you receive all the 1099s owed to you and that they’re correct. Review your 1099s against your invoices, and ask clients to correct any errors you find. Remember, the IRS gets copies of your 1099s too, so the numbers you report on your taxes need to match theirs.
Speaking of 1099s. If you paid an independent contractor $600 or more in 2018, you should have sent them a 1099 by January 31. If you didn’t, there’s still time to fix it. Get the vendor’s tax ID and address, and file a 1099-MISC for them.
Mistake No. 2: Not maintaining good records
Are you taking deductions for a home office, business use of a vehicle, new equipment you purchased last year, or any other expense from 2018? The 2018 tax law allows business owners to write off the entire cost of qualified purchases, such as computers, business equipment, and furniture. Keeping detailed records ensures your claims are accurate and protects you in case of an audit later on. You can scan and save your receipts digitally, so they’re easily accessible.
While you’re at it, make sure you’re keeping good records of your time worked and billable hours. For best results, use a time tracking system that syncs with your accounting and invoicing solution, so you know your invoicing and expense tracking numbers are consistent. Better yet, find a solution that tracks time against different clients, so you can track what you’re doing for whom and for how long, to generate accurate invoices.
Mistake No. 3: Not making your estimated tax payments
When you’re self-employed, it may seem like you’re making a lot more money than you did as an employee. That’s because all the taxes your employer used to withhold from your paycheck (Social Security, Medicare, and state and federal income taxes) are no longer being taken out. It’s your responsibility to withhold and pay these taxes using quarterly estimated tax payments.
You will need to pay estimated taxes if you expect to owe more than $1,000 in taxes in a given year. You can figure out these taxes using form 1040-ES, Estimated Tax for Individuals, then either mail in your payments quarterly or make them online using the Electronic Federal Tax Payment System (EFTPS). You should also check with your state, county, and city to see if they require quarterly estimated tax payments.
Making estimated payments is often most difficult in the first year of self-employment, so reviewing your income and expenses monthly or even weekly will help you adjust your estimated taxes as needed. Once you’ve got a year of self-employment under your belt, you can use the prior year’s income to calculate what your estimated tax payments should be. Unless you expect a major increase in income, paying the same amount as last year is generally sufficient. It’s better to overpay a bit than to underpay, as underpaying can expose you to penalties.
Mistake No. 4: Not taking the home office deduction if you’re entitled to it
For many years, taking the home office deduction was considered a red flag that could trigger an IRS audit. That’s no longer the case as the IRS has simplified their method for figuring the home office deduction. If you’re entitled to a home office deduction, which applies to renters and homeowners, take it.
To take the home office deduction, you must show that a specific space
- Is in your home.
- Is regularly and exclusively used for conducting business.
- Is in a home that is your principal place of business.
Figure out what percentage of your home is devoted to business, and you can deduct that percentage of expenditures for home maintenance and repairs, utilities, homeowner’s insurance, homeowners’ association fees, mortgage interest, and property taxes. Just don’t forget to maintain these records!
Mistake No. 5: Not filing taxes on time
Are you afraid you’re going to owe a ton in taxes this year? Burying your head in the sand and not filing won’t help the situation. It will increase your tax bill by adding late fees and penalties to what you already owe. If you’re legitimately trying to get your act together and worried you can’t file on time, apply for an extension. This is better than rushing through your tax preparation and making avoidable errors.
Mistake No. 6: Not getting professional help
A good tax preparer can more than pay for themselves in how much they’ll save you on your taxes. Especially with recent tax law changes, having someone on your side who knows the ins and outs of the tax law is a big benefit for your business. Look for an accountant or tax preparer who specializes in self-employed workers and independent contractors.
Tax preparation may seem intimidating when you’re on your own. But it doesn’t have to be. With the right tools, attitude, and assistance from experts, you can keep more of the money you’ve earned and stay on the right side of the law.
Rieva Lesonsky is the CEO of GrowBiz Media, a media and custom content company focusing on small business and entrepreneurship. Email Rieva at email@example.com, follow her on Google+ and Twitter, and visit her website, SmallBizDaily.com, to get the scoop on business trends and sign up for free TrendCast reports.