If you’re filing taxes as a solo entrepreneur (sole proprietorship), you may be new to self-employed tax rules. Here are some tips and tricks to help you get the most out of your tax return.
When filing taxes as a self-employed individual, it’s important to maintain accurate financial records, pay self-employment taxes, consider retirement contributions, and take advantage of business deductions.
This article will break down the most important considerations for entrepreneurs during tax season, including how to save and file your taxes correctly.
Tax Guide for Self-Employed Financial Records
If you’re a one-man or woman business, keeping up-to-date financial records is vital. This will help facilitate your filing process come tax time, and your future self will thank you later. Record-keeping is also an essential process in case you are randomly audited by the Internal Revenue Service (IRS) in the future.
Before moving forward, be sure that your records are split into personal and business folders. You want to keep these separate to avoid confusion or misinformation. This includes considering opening a business bank account with a debit/credit card to fully isolate your business financial transactions.
For those with complex business transactions, you may want to consider using a professional record-keeping service or hiring a bookkeeper.
Important Documents for Tax Season
So, what should you keep in your records? The most important things are gross receipts for purchases and expenses incurred by your business. Many of these can be used as deductions, which we will get into later, so keeping track of them is key. These expenses even include travel and transportation for work-related events.
The second section of documents to preserve are those around assets. This includes recording annual depreciation or gain/loss if you sell those assets.
For more information on proper record-keeping, check out the IRS FAQs.
Self-Employed Tax Tips
When it comes time to file, there are three main considerations to keep in mind: paying self-employment tax, retirement contributions, and deductions.
Paying Self-Employment Tax
The IRS requires all entrepreneurs and business owners to pay self-employment tax. As of 2021, this rate was 15.3% (12.4% for social security and 2.9% for Medicare).
Unlike traditional filings, self-employment tax is paid quarterly, due in April, June, September, and January. You can pay online, by phone, or via an app and can find more instructions on the IRS website.
Through effective record-keeping, you can pay your estimated quarterly taxes throughout the year. If you end up paying more than you calculate during tax season, you might be eligible for a tax return refund come April.
If you miss a quarterly payment or avoid them altogether, you’ll be docked by the IRS. The penalty starts at 0.5% of what you owe and can creep up to as high as 25% – so be sure to pay those quarterly taxes.
Self-Employed Retirement Contributions
If you’re self-employed, you are eligible to open a retirement plan. This not only helps you save for your future, but it also provides some excellent tax breaks.
If you work alone and have no employees, you can set up an individual 401(k) plan or a Simplified Employee Pension Plan (SEP).
Individual 401(k)s allow you to contribute up to $19,500 of pre-tax earnings in 2021.SEP IRAs allow you to contribute up to 25% or $58,000 of your net income as of 2021.
Most of your contributions to these retirement plans can be deducted from your income when you pay your taxes. This means you have the option of legally avoiding paying taxes on thousands of dollars of your income before retirement.
We’ve finally arrived at the most exciting part of this tax guide for solopreneurs – deductions. Tax deductions – also called write-offs – are expenses you have paid during the year for your business that can be discounted from your income, resulting in a lower tax bill.
Deductions are the bread and butter of coming out on top when it comes to self-employment taxes, so you’ll want to claim all the ones you can.
The most common self-employed deductions are:
- Vehicle expenses used for business purposes OR the standard mileage deduction
- Retirement contributions
- Insurance premiums for liability, malpractice, or professional needs
- Some personal health insurance policies may also be deducted
- Office supplies
- Home office expenses
- Credit card or loan interest paid for business cards
- Phone and internet costs (for office use)
- Business meals
- Business travel
- Start-up Costs
- Continuing Education
- Professional subscriptions or memberships
Many deductions are claimed on the honor system, but it’s important to keep accurate records in case you are audited one day.
Self-employed tax time doesn’t have to be daunting, especially with our solopreneur tax guide. With avid record keeping and accurate quarterly self-employment tax payments, you are already off to a great start. Pair that with retirement contributions and self-employed deductions, and you’ve got yourself a manageable season with plenty of tax breaks!