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Tax Toolkit for the Self-Employed
Here are the forms you need to file and the deductions you can take if you did freelance work or started a small business this year.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
December 19, 2008
Editor's note: This story was update in 2010.
I picked up some extra work as a freelance consultant to help make up for my dwindling retirement savings. What do I do about income from self-employment at tax time?
Here are some key things you need to know about taxes if you did freelance work this year or started your own small business – and strategies that can help minimize the bill.
What to file. When you file your 2009 tax return, you’ll need to submit a Schedule C in addition to your 1040. You can use the shorter Schedule C-EZ form if you have business expenses of $5,000 or less, have no employees and no home-office deduction.
If your net earnings are more than $400 for the year, you’ll need to file Schedule SE to figure your self-employment tax, which includes Social Security and Medicare taxes. The rate is 15.3% of your net earnings. People who are employed by someone else pay Social Security and Medicare taxes of just 7.65%, with the employer paying the other half. Self-employed folks have to pay the full bill, but you get to deduct half of the amount you pay on Schedule SE on your Form 1040.
You should receive 1099s from clients reporting your 2009 income. That’s where you’ll find the information you’ll need to complete these tax forms. For more information, see Filing Requirements for Self-Employed Individuals and IRS Publication 334 Tax Guide for Small Businesses.
What you can deduct. You’ll be able to write off many of the expenses from your freelance business, including the cost of a computer, printer, fax machine, copier and other equipment you use for work. Work-related phone calls and mailings, office supplies, copying, advertising, business travel and other expenses are also deductible.
Your health-insurance premiums may be deductible if you aren’t eligible for health insurance from an employer or your spouse’s employer (you can’t deduct more than the net income of your business).
You also may be able to write off the business use of your home, including a portion of your homeowners insurance, utilities, rent or mortgage interest (which is more valuable as a business deduction than as an itemized deduction). The amount of these deductions is based on the percentage of your home used for your business. To qualify, you must use the space for work on an exclusive and regular basis, and your home office must be your primary place for conducting business or meeting with clients. See the IRS Tax Topic on Business Use of Your Home and Publication 587 for more information about the rules. Also see a href="/columns/ask/archive/tax-breaks-for-the-selfemployed.html">Tax Breaks for the Self-Employed.
For a quick checklist of possible deductions, see our Taxopedia on Deductible Business Expenses . And for more information about deductions, see IRS Publication 535 Business Expenses and the instructions for Schedule C.
Special retirement savings. You can also lower your tax bill by making a tax-deductible contribution to a retirement plan for self-employed individuals. If you're a sole proprietor, the two best choices are a Simplified Employee Pension or a solo 401(k). See Do-It-Yourself Retirement Plans for more information.
Quarterly estimated taxes. If you continue to earn self-employment income and aren’t having any taxes withheld from your checks, you may need to make tax payments by submitting the IRS Form 1040-ES each quarter. Otherwise, you could end up with a penalty for late payments.
Generally, you should pay quarterly taxes if you’ll owe more than $1,000 when you file your return. If you or your spouse has another job, you can increase your withholding to cover the extra income rather than bothering with quarterly payments. For details, see the IRS’s page on Paying Estimated Taxes, and use Form 1040-ES to figure and pay the tax.
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Reader Comments (9)
Posted by: Gordon at 11/17/2009 12:44:16 PM
I'm buying a car for my photo business, I had income of about $4,000. I also have w2 income of about $52,000. Can I use sec179 for the car and do Ihave to pay Social Security and Medicare taxes on the $4,000?
Posted by: Anpadh at 11/18/2009 10:10:32 AM
You can 179 your car, but only to the extent of your business income ($4,000.00, in your case). So, if your car is worth $20,000.00 and you were planning to write off 25% ($5,000.00) you can't, because your BUSINESS income is only $4,000.00. And yes, you do need to pay Soc. Sec. and Medi, until your total income hits $105,000 ($169,000 -- I think -- if you are married, filing jointly). Frankly, you are better off taking mileage on your car for business and including depreciation while itemizing on your personal 1040. I am assuming you have a "C" corp. If you have an "S" corp. or an "LLC" that changes everything.
Posted by: yola ghammashi at 11/22/2009 11:42:22 AM
I turned 62 in April and opted for early retirement. I have a home based business (incorporated) and work part time for a college. I am having a hard time figuring out how much is too much to earn this year as far as SS is concerned and how to calculate my before and after April earnings. Thank you!
Posted by: virginia at 11/22/2009 12:50:01 PM
I work in the service industry on a part-time or "as needed" basis. Some companies consider me an employee and others hire me as a contract person. Thus, I have both self-employment and W-2 income. One of my employers contributes to an FSA account for me but I pay 100% of my health insurance. Does the FSA account disallow me to deduct my health insurance?
Posted by: Melissa at 11/22/2009 09:25:33 PM
I'm just starting up a freelance business. I had planned on it starting up earlier in the year but.. so I have very little income ($400 if I'm lucky) from the business before January at this time. well long short, I had planned on getting softwear bought before the end of the year so as to get both full credit of new Mac and new softwear at the same time. Would it be wiser of me to hold off on buying the new softwear in January so I get full credit (rather than depriciated credit) or would it still benefit me more to do it now? Thank you for your time
Posted by: bettyc at 12/02/2009 10:46:42 AM
How do I make monthly deposits of sales tax receipts - thank you
Posted by: K2 at 01/25/2010 06:15:21 PM
I own an S corp business, no employees. Due to lack of business I made myself "self employed" this year. and will file a 1099 MISC on myself. I file jointly with my husband, who is a state employee with PERA withheld (not social security) should I file a form 1065 (including a Schedule K-1) and a Schedule SE (form 1040)?
Posted by: A.K.W. at 05/10/2010 09:14:49 PM
Lovingly done is better than spectacularly said.
Posted by: V. D. at 05/16/2010 03:44:34 AM
You actually respond to specific questions in the comments section. That's rare and very nice of you. So I'd like to ask a couple of questions. I project my earnings to be $6,677 this year and using an online self-employment tax calculator, I'm shown I'll owe $943 in taxes (it includes the 1/2 SE credit). This is less than $1,000, so I don't need to file quarterly. My first question is since this amount doesn't include any other credits, what will I actually be paying? I only have three other credits/deductions: the EIC ($457), the Make Work Pay (MWP) credit ($400), and a small deduction of paying for Internet (I use the Internet for personal use too, but mostly for work; I pay $14.95 a month and I was going to claim $5 as a business expense/deduction--any input here would be appreciated as well, since I don't where this deduction goes on the Forms or Schedules and how to even calculate what I should be deducting). My second question is do I subtract the EIC and MWP credits to determine the $1,000 mark or only the deduction of the 1/2 amount of the SE tax, which is how the tax calculators do it. I'd like to increase my earnings and could do so without having to pay quarterly if the EIC and MWP credits were factored in. Finally, I keep reading that you can take MWP tax credit throughout the year if you're paying quarterly, but nowhere can I find any step-by-step instructions for how to do this. Also, can you claim the EIC throughout the year too or just once a year after the tax year is over. Thank you so much!