How Taxes Are Different If You're Self-Employed

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Nobody likes doing taxes. When you’re self-employed, you’re looking at even more work than if you’re employed by a business. 

Here’s what to expect when filing self-employment taxes.

What does it mean to be self-employed?

If you’re self-employed, you don’t work for an employer. Instead, you make money doing contracting, freelancing, or gig work. When you employ yourself, you create contracts directly with your clients.

Being self-employed is a lot of extra work but also gives you more flexibility. You make your own hours and decide how much you take on. You also set your own rates, so you determine how much money comes in (for the most part).

Who files self-employment taxes?

You don’t have to run a big corporation to be self-employed. A sole proprietor is anyone who runs an income-making operation⁠—and it’s an automatic status—meaning there’s no legal work to be a sole proprietor. 

If you made over $400 or more on your own, you’re a sole proprietor and have to file taxes (unless you’re a church employee). 

Unfortunately, taxes for sole proprietors are a bit more complicated when you’re self-employed.

What’s different with taxes when you’re self-employed

First of all, when you run your own business you have to track all your finances. When you have an employer, you get a W-2 every year that tells you how much you made. When you’re self-employed, you’re responsible for tracking income.

You’ll want to stash 25% to 30% of any income in a savings account to put toward your taxes. That way, you won’t have a huge IRS payment due with no way to pay.

Also, you have to keep tabs on your expenses. To do this, you’ll need to understand what counts as a business expense and what doesn’t. 

Many unexpected items are possible business expenses, like mileage on your car and part of your rent.

Finally, you may have filed your taxes yourself in the past. 

When you’re self-employed, many people hire an accountant to do their taxes. Things can get complicated fast, and you’ll probably need help.

Ways to save money on filing taxes

Paying taxes doesn’t have to be a huge burden. There are a few things you can do that can help you save money each year.

Talk with an accountant

You might be tempted to save a few hundred dollars and skip the accountant, but working with someone who understands the ins and outs of tax laws can point out deductions you wouldn’t have considered.

However, if you’re going the accountant route, shop around first. Call several offices and ask what their rates are, then pick the best one in your budget. 

If you’re starting a new business, you may want to meet with a financial expert before starting to get a breakdown of what to track. By keeping tabs on everything from the get-go, you can avoid the tax filing scramble, trying to remember how many ink cartridges you used in a year

Reduce your net profit

Net profit is how much you made minus how much you spent. The lower your net profit, the less you pay in taxes. 

Paying less in taxes is why it’s so important to track all of your business expenses. 

If you forget to include a big item like office space on your taxes, you’re missing an opportunity to make your net profit smaller and you’ll end up paying more

Include tax write-offs

A business tax write-off, also called a deduction, is something you paid for that’s related to your business. 

There are many business expenses that you might not consider, like: 

• Office space: If you work from your home, you can deduct part of your rent or mortgage from your taxes.

 

• Miles on your car: If you drive to meet clients or attend business-related events, you can add up your mileage and deduct them from your taxes

 

• Cell phone or internet bill: If you use your cell phone or your home internet for business, you can write off part of them on your taxes.

 

• Health insurance: Anyone who couldn’t get health insurance through a spouse’s employer and pays for their own plan can deduct all health-related expenses on their taxes

Contribute to retirement

Another way to lower your tax burden is to put money toward retirement while you’re self-employed. You can set up a 401K with one participant (you), a Simple IRA, or contribute to a Traditional IRA. 

You may be able to write off a portion or even all of your retirement contributions. For more information on contribution limits see IRS Retirement Plans for Self Employed People or discuss with a tax consultant.

Taxes aren’t fun, but they don’t have to be a pain. If you’re careful through the year about tracking what you spend and what you make, tax season can be a breeze.

Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s).

Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s).