taxes

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.

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 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.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
October 13, 2021
15 U.S. Cities With the Highest Average Home Prices
real estate

15 U.S. Cities With the Highest Average Home Prices

Home prices have rocketed higher across most of the country, but housing costs are acutely painful in these 15 U.S. cities.
October 20, 2021

Recommended

How and When to Opt-Out of Monthly Child Tax Credit Payments
Tax Breaks

How and When to Opt-Out of Monthly Child Tax Credit Payments

If you want to stop advance payments of the 2021 child tax credit, you can opt-out using the IRS's online portal before the monthly deadline.
October 27, 2021
Child Tax Credit Payment Schedule for the Rest of 2021
Tax Breaks

Child Tax Credit Payment Schedule for the Rest of 2021

The IRS has already sent four batches of monthly child tax credit payments. Here's when you can expect the remaining payments.
October 27, 2021
Next Child Tax Credit Payment Opt-Out Deadline is November 1
Tax Breaks

Next Child Tax Credit Payment Opt-Out Deadline is November 1

The due date for opting out of the November 15 monthly child credit payments is right around the corner. Why some people don't want to miss that deadl…
October 27, 2021
How Snowbirds Can Be Taxed as Florida Residents
retirement

How Snowbirds Can Be Taxed as Florida Residents

If you live in a high-tax state during the summer but winter in Florida, you can save big bucks by establishing residency in the Sunshine State.
October 25, 2021