Large Firm Skills
With Small Firm Service

What self-employed individuals need to know about taxes

On Behalf of | Oct 24, 2019 | Federal And State Tax Collections |

Working for yourself comes with many benefits. It is the concept of freedom that draws most people to this career path. However, self-employment also requires a great deal of responsibility. While an employer used to take care of matters like withholding income for taxes, it is now your job to ensure you are abiding by New York state and federal tax law. This involves keeping accurate records of income and expenses and working with a tax specialist to set up a plan to pay your taxes independently.

Additional fees: Self-employment tax

When you work for a company, your employer pays half of the required Social Security and Medicare taxes. They withhold the amount from your paycheck, and you pay what remains. It is still necessary for each individual to pay for these federal programs, so you’ll need to pay a separate tax to the government with your contribution called the self-employment tax. As a contractor individual, you are responsible for the total amount of 15.3%. However, you can deduct 7.65% of that amount as a business expense.

Aside from the taxes you pay, what forms will you have to fill out?

Form 1099: Explained

If you earned income while self-employed in the last year, the IRS will send you a 1099 form to file. Note that there are different variations of this form and each has its own requirements. The type of 1099 is determined by the source of your income.

Avoid the 6 mistakes contractors make on 1099s

  • Not writing off all your business expenses. Keep meticulous records of all business transactions so that write-offs at tax time are an easy process. You can save hundreds or even thousands of dollars by practicing good accounting.
  • Writing off personal expenses. It is illegal to deduct personal expenses from your business tax returns, so it is vital that you evaluate your records and proceed with integrity. If an item involves both personal and private use, you will need to determine which use is dominant. For example, if you use the same cellphone for business and pleasure, you may want to consult with your accountant. You’ll need to prove that you use the phone more for business than for pleasure to be able to write your phone off legally.
  • Inaccurate mileage and car expenses. Does your work require use of a vehicle? If so, you may be able to write off both mileage and wear and tear. However, you need to know exact numbers. If you don’t keep track of this in advance, it is safer to not write anything off at all. To avoid a potential audit, take the lesson and track it next year.
  • Not paying quarterly taxes. Self-employed individuals should file quarterly taxes. The IRS specifies due dates four times a year for these payments. If you do not follow the recommended practice of quarterly tax installments, you may be responsible for a huge lump sum at tax time.

Plan financially and know your tax obligations before entering the self-employed arena. If you find yourself in the difficult position of an IRS audit or need to file a delinquent tax return, tax representation in the form of an experienced lawyer is a good investment.