Self-Employed Tax Filing, A Comprehensive How To Guide

Mon Apr 11, 2016 21:59:24PM
Home office setup, typical of an independent contractor.By: THOR

If you receive a 1099-MISC tax form, these guide is for you. Independent contractors, small business owners, and otherwise self-employed folks, use these 5 straightforward steps to fully take care of your tax filing and payment obligations.

1) Pay Estimated Taxes Quarterly
(In truth, it's best to just pay your taxes every month)

As a self-employed filer, tax costs such as Social Security and Medicare aren't automatically withheld from your earnings. So you are required to make quarterly estimated payments yourself. Keep these dates in mind:

1st payment - April 18th
2nd payment - June 15th
3rd payment - Sept 15th
4th payment - Jan 17th

That's a good yard stick to use every year, for quarterly due dates. Although also keep in mind those dates will change slightly from year to year filing. Those are the 2016-2017 deadlines to pay your quarterly estimated taxes.

**A much easier way to handle this though is just to pay your estimated taxes every single month. This way you won't have to worry about setting tax payments aside for 3 months (with the very real temptation to spend it). **

To pay your proper withholding, do so using these tools:

  • Form 1040-ES. This form will walk you through the entire process of estimating what your quarterly tax amount will come to. If you are new to filing as a self-employed worker, you will find yourself possibly paying either a little too much, or not quite enough. That's okay. If you overpay, you will get a refund at the end of the year, once you file. And if you underpay, just know that you will get a bill in the mail for the leftover amount.

  • If you have already filed as a self-employed worker before, and expect your earnings to be exactly what they were last year, just calculate what you paid quarterly (or monthly) in taxes, and pay that amount in advance using the portal link below.

  • The Electronic Federal Tax Payment System. This is the portal to allow you to pay your estimated taxes online. Go to that link, and enroll into the federal program. The initial enrollment period takes about 7-10 business days, as you need to get a PIN mailed to your home address. Once you get that PIN, you can fully login and pay your estimated taxes however you see fit. You can pay them at any interval of time: weekly, monthly, quarterly, etc. If you do not pay quarterly however and just wait until the end of the year, you will incur a slight penalty fee.

2) Self-Employed Tax Obligations
(What you have to pay, %s, and why)

Normally, incorporated companies automatically take out federal with holdings, which are Social Security and Medicare costs. This is a percentage that changes sometimes from year to year, but typically is 15.3% of your total earned income (12.4% for SS, and 2.9% for Medicare).

Also typically an employer would be responsible for half of that (7.65%), and the employee would get the other 7.65% withheld from their check. Self-employed workers on the other hand have to pay the full amount; it's one of the trade offs.

On the flip side though, you can deduct the other 7.65%, luckily come annual filing time. More on that below..

3) What Forms To File

Form 1040, Schedule C. If you get the 1099-Misc form instead of a W-2 from your employer, or you are considered by the IRS to be the sole proprietor of a profitable business, you will use this form to annually file.

Turbo Tax and the IRS's Instructions for Schedule C filing are both great resources on just how to file a Schedule C, that I have personally found to be very useful, especially for beginners.

4) Deductions You Can Take Full Advantage Of

The good news about being self-employed is you can take advantage of a ton of deductions to help ease the tax debt you will incur. Some possible write-offs you will qualify for include (but aren't limited to) the following:

  • Home office costs and utilities (if you work from home)
  • Automobile expenses
  • Depreciation of equipment used for business
  • Education expenses
  • Food stipend
  • Travel costs
  • Clothing for work
  • IRA investments
  • Half of your Medicare and Social Security taxes

Some resources you can use to study up on what all you can legitimately write-off, to get you started:

Top Tax Write-offs for the Self-Employed
10 Tax Deductions & Benefits For The Self-Employed
Most-Overlooked Tax Breaks for the Self-Employed
Tax Deductions Guide for Freelancers and the Self-Employed

5) Get Professional Help
(For at least the first year of filing)

When it really comes down to it, the best answer to file if you are self-employed is to hire a tax professional, tax lawyer, tax consultant, etc. Whatever the title, verify they know what they are doing, are reputable and know that ultimately you will be on the hook for whatever they ultimately recommend and send off to the IRS.

So be thorough and do your research. It really helps to fully understand the process through and through. Hire a professional for the first time around. Then just pay attention, and perhaps for the 2nd year onward, you can file yourself with full confidence.

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Thanks for the important information.
I tried to report wages the notice said unable to accept online.