Self-Employed? Here's How To Do Your Taxes

Being self-employed can be a source of personal satisfaction, but also headache, especially when it comes to doing one’s taxes. Fortunately, there’s an extremely lucid step-by-step guide posted over at E-How. They’ll walk you through everything you need to do, from determining your status, to your expenses and deductions. The guide points out important things to remember, like the extreme importance of using exact numbers when claiming deductions. Rounded numbers might be easier to add, but they’re also a red flag to IRS auditors (if you learn nothing else from Girls Gone Wild, let it be this).

How to File Taxes if Your Status Is Self-Employed [e-How]

Comments

Edit Your Comment

  1. ClayS says:

    I’m self-employed and use an accountant to do my taxes. Some people may be able to do their own, depending on the complexity of their business. But I think if you need to look to e-How for guidance on the process, you are probably in over your head.

  2. hypnotik_jello says:

    If you’re self employed and don’t have any employees, I highly recommend using a program such as quickbooks or microsoft small business accounting to track your income/expenses. Take an accounting class online or at a local community college. Proper book keeping can go a long way to help defend you if you are ever audited, as well as simplify tax-time by generated expense reports by expense type. Oh, and the IRS does want you to round your fractional dollar figures up/down to full dollars amounts.

  3. johnva says:

    @hypnotik_jello: The writeup here is of poor quality, but the article says exactly that: you should round off the fractional dollars. The article is referring to people “rounding off” large dollar amounts. THAT is what is a red flag for the IRS (duh).

  4. ManiacDan says:

    Another tip to people who are self-employed is to check to see whether you are actually self-employed! My first ever “real” job tried to give me a 1099, which would have bumped my income taxes up to 53%!!! I was shocked, so I did some research. Turns out, you are only self-employed if:
    1) You can realize a loss on a job
    2) You can decide the method and time frame for your work
    3) You operate an independent store front or some other means of acquiring new clients.

    So even if you’re “hourly” and you are told you’re a contractor, you can greatly reduce the taxes you pay by checking to see if your situation is actually independent. If you have been paid as a contractor and you should not have been, you will still have to pay your income tax, but you will NOT be responsible for the employer’s commitment.

    Basically, if you have a “real job” where you have a boss and you get paid for your time and you don’t have to buy your own materials, you’re an employee, end of story.

    I have more research materials on this at home, if anyone else is interested in the official definition of “employee” ask here and I’ll try to find it later. Or you could google it, I’m not your search engine!

  5. MercuryPDX says:

    @ClayS: Seconded. AFAIC, it’s worth it for me to pay the $200 for the accountant, who will egt back all the legal deductions he can and make a potential audit go much smoother.

  6. criticman says:

    I hired a CPA firm to do my taxes my first year “on my own”. At that time I was simply self-employed. They screwed up twice, I caught both errors (taking Tax Accounting in college actually paid off) and they refiled. I paid $40 for their service on what I assure you was a substantially higher bill.

    Last year I used TurboTax’s home & business, as well as their state solution. It walked me through all of my options and I had no issues completing it even though I am now both self-employed and a full-time employee at a company.

    After a lot of consideration, I will be using TurboTax again this year. I cannot risk finding another idiot CPA — and yes, the one I went with previously was the “best in town” and “recommended” by the professors in the AACSB accredited business school at the college I attended.

    Now, for my filing due in 2009, I will seek a professional as I will be getting married this year and hopefully buying a house. Until then, the software (with some general tax awareness) will do (knock on wood).

  7. diamondmaster1 says:

    @ManiacDan: Too true!

    I was once employed by a firm that preferred to miscategorize their employees as ‘independent contractors’–despite the fact that they met NONE of the IRS criteria for such a classification.

    Wonder if the IRS still pays snitches if they collect back taxes on companies? I think I could make some nice scratch off these folks, since they are still in business.

  8. criticman says:

    According to my Tax Accounting professor, the IRS does still pay snitches…we were almost going to turn a friend in who was essentially a private car broker because he never kept a car long enough and always made a profit.

  9. ManiacDan says:

    @diamondmaster1(and everyone else): I reported my employer to the IRS and was not compensated, except for the lower taxes, that is. It wasn’t a widespread policy though, more like a “screw the young guy” type of thing. I have successfully lowered friends’ taxes this way though. You wouldn’t believe the number of people that think they’re independent because they don’t get health insurance or some such nonsense. Basic rule of thumb is, if you have a boss, you’re an employee.

    Interesting that you could get paid for being a snitch, maybe I should pay more attention this tax season.

  10. gingerCE says:

    As both (self-employed) and having a regular job, I still do my taxes myself. I’ve done it myself several years and am used to it–but if you don’t know how to do it, then get help for 1-2 years until you are able to do it yourself.

    I had help the first time–family friend used to work for the IRS–otherwise go to an accountant–but be prepayed to pay a lot.

  11. gingerCE says:

    The only thing I’m worried about is I think this year I will have to 1099 two people–and I’ve never done that before. Sigh.

  12. Sudonum says:

    @criticman:
    I second the use of Turbo Tax. I’ve been self employed and using it for 10 years. I thought my 2005 return was going to be more complicated due to some real estate transactions, so I hired an accountant (a very good one used by my father-in-laws firm). I ran it through Turbo Tax after he was done and it found a few more deductions he missed.

  13. samurailynn says:

    I’ve always done my own taxes. The advice that I got (from someone working at the IRS) is to never hire someone to do your taxes for $40-70. Basically, don’t hire H&R Block or the other “fast-food” tax places. If you’re going to hire someone, you probably want to hire someone who is a CPA, and they will probably charge you $50+ per hour.

  14. criticman says:

    @gingerCE: That is why I went to the CPA the first year. Really, it is super simple. You file one form with the gov’t and give the 1099 to the contractor. Google “information returns 1099″ or your software can handle it for you.

  15. wealthkick says:

    Samurailynn: I agree with you here. I’ve always used H&R Block to do my taxes. In addition to it being a fairly large expense, the last three years that I had them do my taxes I ended up doing most of the work. In my opinion, it’s much easier to do your taxes on your own once you feel confident understanding the terminology. I suggest buying TurboTax or TaxCut and doing your taxes yourself. It’s cheaper and it’s a good way to teach yourself about your personal finances.

  16. qmsterling says:

    H&R Block.com, baby!