Anyone who starts their own business eventually needs to learn how to file taxes as a self-employed worker. The alternative, not filing taxes and seeing your back taxes bill balloon over the years, isn't pretty.
So if you're thinking of striking out on your own and starting a business, or if you already have, and you're wondering what you need to do to file your taxes with the IRS successfully and by April 15, 2020, you'll want to take the following steps:
-- Determine if you need to pay taxes.
-- Decide who will do them -- you or a tax professional.
-- Collect your paperwork.
-- File your taxes or send them to a professional.
-- Plan for next year's self-employment taxes.
Determine If You Need to Pay Taxes
For most people, it'll be pretty obvious if you need to pay taxes: If you're self-employed and earning a living, the IRS is going to want some of that.
On the other hand, if you're just starting your business and have barely earned a cent, maybe not. According to eFile.com, "You must file a tax return if your total self-employment income is at least $400." It adds, in case there is any confusion, "This is different compared to if you are an employee and these payments are automatically withheld from your pay and paid for you by your employer."
But generally, if you are working for yourself and earned a living in 2019, you will need to file a tax return in 2020.
Decide Who Will Do Them -- You or a Tax Professional
This is a decision anyone doing their taxes needs to make every year. Still, if you're recently self-employed and have always done your own taxes, keep in mind that there are good arguments for hiring a professional rather than doing this on your own. After all, when you're an employee, your taxes are taken out for you, and you may not have a complex financial situation.
When you are working for yourself, you may have a lot of deductions to report, and knowing what can be reported and what can't can get complicated.
As for how much it will cost to hire a tax professional, it varies. According to a 2018 report from the National Association of Tax Professionals, the average charge to prepare an individual's tax return was $216.31. Given that a self-employed person's taxes may be more complex than average, the cost may be slightly higher.
Collect Your Paperwork
Lisa Greene-Lewis, a certified public accountant, TurboTax spokesperson and contributor to the U.S. News My Money blog, says, "Before you start filing, be sure to gather and report all sources of income, including all 1099 forms. Keep in mind that 1099-MISC may only be issued if you were paid $600 or more for your work, and you will only receive a 1099-K form if you accept payment through a third-party provider, have more than 200 transactions and make more than $20,000."
Greene-Lewis says that even if you don't receive 1099s, "it's important to keep careful records and track all income under these limits as you still need to report all income regardless of whether or not you received the forms."
There may be a lot to collect, depending on your job. You may have expenses, such as computer equipment or printer ink. You might drive a lot and need to track your mileage. You will probably be able to deduct a decent amount of medical expenses.
Joshua Zimmelman, president of Westwood Tax & Consulting LLC in Rockville Centre, New York, says, "Employees have limits to what expenses they can deduct, but if you're an independent contractor or freelancer, you can deduct many business expenses. For a Lyft or Uber driver, for example, this might include gas, parking fees, car maintenance and repairs, auto insurance and any other expenses you incur for your car."
On the other hand, if you have a business where you're at your computer a lot, rarely purchase equipment and never leave your home office, you may not have much to deduct.
File Your Taxes or Send Them to a Professional
This is a pretty self-explanatory step in the process. Just be sure, if you're doing your taxes, to give yourself plenty of time to do them. If you have a few days, or even weeks, until the April 15, 2020, deadline, and you can spend time preparing your taxes without looking at the clock, you'll be less inclined to make errors.
[See: 7 New Taxes Retirees Face.]
Plan for Next Year's Self-Employment Taxes
This is where you'll really do yourself a favor for next year. Start preparing for your 2020 self-employment taxes now.
"Each year, a few new clients come to me with issues from self-employment. The most common is failure to pay estimated taxes," says Beth Logan, an enrolled agent and owner of Kozlog Tax Advisors in Chelmsford, Massachusetts.
Logan adds: "Self-employed people must pay their federal income tax, their state income tax -- if any -- and their Social Security and Medicare contributions. Self-employed people are both the employer and the employee. Therefore, they pay both halves of the Social Security and Medicare contributions (called self-employed tax or SE tax) which totals 15.3 percent of profits up to the Social Security income limit."
That adds up. "When you include SE tax, federal income tax and state income tax, the amount owed can easily be 25 to 40 percent, even for middle-income Americans," Logan says.
If you aren't ready for that, Logan says, it can be pretty shocking to find out what you owe the IRS.
She says that estimated taxes should be paid quarterly -- April 15, June 15, Sept. 15 and Jan. 15 -- based on your profits for that quarter.
So if you are self-employed and feel like you weren't ready to prepare your taxes this year, start working on next year's now, while you're in the proper financial mindset. Your future self will thank you.
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