File Taxes if Self Employed
How To File Taxes If Self Employed In 3 Easy Steps
If you’re a freelancer, or basically work for yourself, you’ll probably need to file an IRS Schedule C when tax time rolls around. This would include you folks that have a side gig, or maybe run a small business too. When you file taxes if self employed, you need to be aware of some of the tips that may save you time and your hard earned money.
We’ll cover who has to file a Schedule C – how it works – what it is, and what it does to your tax return.
What is a Schedule C?
A Schedule C is an IRS tax form that is used to report income and expenses associated with a small business operated by a single owner. This includes freelancers and gig workers and also single member LLC’s. When you’re preparing your Form 1040 tax return, this schedule is included and is filed electronically with the tax return.
Quite often, people who file a Schedule C, will receive Form 1099-NEC’s from those that he provided services for. Be aware that you must report the total of Form 1099-NEC’s PLUS any other income received not reported. Keep accurate records and if you’ll tie in all of the income received with your bank statements, and if you’re audited, it will go a lot smoother.
Who is required to file a Schedule C?
Primarily, a Schedule C is used only by sole proprietors and a single member of an LLC. It is not to be used by partnerships or corporations. A sole proprietor is one who owns an unincorporated business and is entitled to the profits. He is also responsible for any losses and liabilities of the business. He is also responsible for filing income tax self employed tax return.
A single member LLC is a business entity that is owned by just one person. Usually the LLC is formed to give some liability protection to the owner. However, the IRS considers it as a disregarded entity for tax purposes, and requires all income and expenses to be reported on a Schedule C.
If you do freelance work in addition to your regular day job, you must report the income and expenses on a Schedule C. Don’t let that requirement stress you out though. The HBS Financial Group teamed up with the savvy folks at 1040.com, a division of Drake Software. We provide you with secure online tax filing for self employed individuals for a flat rate cost of only $25. No upsells for higher priced forms like the rest. Check it out here.
When you file taxes if self employed, most people use a Schedule C. However, if your principal operation is farming, you’ll file a Schedule F. For those who have rental real estate, they will report their activities on a Schedule E.
What information is reported on Schedule C?
Starting at the top, you must report all income received, no matter if you got a 1099 for it. Just below that section, you will list the various expenses that are applicable to the business. If you use your personal vehicle in the business, be sure to keep an accurate mileage log to back up your expense deduction.
There is a section on the schedule called cost of goods sold (CGS). If your business involves selling a product, this section must be completed. For a new business, there is no beginning inventory. Add up your total purchases for the year and enter it on the line called for. For your ending inventory, calculate your cost of any unsold items and enter that on the appropriate line.
Your cost of goods sold for the year is calculated by adding the beginning inventory and purchases and then subtracting the ending inventory. That balance is used as a deduction to arrive at the net income or loss for the year. This balance will carry over to the income schedule on Form 1040. If you do your taxes yourself online, our amazing program will guide you every step of the way.
There are several subsections on the Schedule C where you will be able to report additional expenses not listed on the form. One of the easy ways to know how to file taxes if you are self employed, is to read the IRS instructions. Another way is to use our online tax filing site and simply answer the interview questions.
Schedule C tax tips
If you do your taxes online yourself at one of the online tax filing providers, like Turbotax, you’ll need to buy one of their high end pricing tiers. This will set you back well over $100, so don’t just accept what they have to offer. The HBS Group will do the same schedules and more for a low cost of $25.
Be advised too, if you have more than one gig to report, you will need to file a Schedule C for each one of them. No combining of gigs.
Home office expense
When you file taxes if self employed, you are allowed to claim a deduction for various expenses that have to do with your home office location. However, the office space must be used regularly and exclusively as your office.
There are two methods that can be used to calculate the expense deduction. For either method, you need to measure the actual square footage of the space. Under the regular method, you divide the square footage of the office by the total square footage of your home to get a percentage of business use.
You then get a total of utilities, repairs, mortgage interest or rent, real estate taxes and other indirect costs and multiply that total by the percentage of business use calculated above. You can also deduct depreciation on the office percentage of your home.
The second method is the simplified method. The IRS allows a deduction of $5 per square feet up to a maximum of 300 square feet, or a maximum deduction of $1,500. You need to make a comparison to see which method benefits you most. Under the regular method, you will have to keep receipts in case of an audit.
Any expenses incurred directly with your office such as office equipment and furniture, can be deducted 100% of the cost. There is a new deduction called the Qualified Business Income (QBI) deduction too. If you qualify, you can deduct 20% of the net profit of your business on the front of the Form 1040.
Estimated taxes
Now that we’ve discussed all of the deductions available to you when you file taxes if self employed, now comes the bad news. Our tax system is based on pay as you go, which means as you earn income in your side gig, you also need to pay taxes on it, federal and state. You do this by paying 4 quarterly estimated tax payments throughout the year. If you don’t, you may be charged penalties when you file your tax return.
Summary
We’ve covered what a Schedule C is, who is required to file one, and various expenses that can be deducted in arriving at your net profit or loss. When you have a net profit, you now need to pay a self employment tax on that money in addition to regular income taxes. To simplify the calculation, you will pay 15.3% of your net profit. However, you get to deduct 50% of the self employment tax as a deduction from total income.
All of these calculations and rules may seem confusing and might make you wonder if you should take your taxes to a tax professional. That’s why we think our online tax filing for self employed program is tops.
Answer the simple interview questions, enter your tax information, and voila…your return is on your computer screen ready for you to review. After that, you can file your return electronically and have any refunds direct deposited in your bank account.
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Gust Lenglet – Platinum Author
