Small Business
May 24, 2024

Top Tax Tips for the Self-Employed

Top Tax Tips for the Self-Employed
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If you own a business or making money off a hobby like knitting or crafts, you are probably racking your brain trying to fully understand what that means tax-wise. Some people are entirely self-employed, and others are juggling between a passion project or working multiple jobs. This can make it especially difficult to figure out how to properly manage personal and self-employed taxes.

For all of the go-getters who are self-employed, side hustlers and everything in-between, we’ve compiled answers to the most frequently asked tax questions so you can focus on what really matters – your business.

1.     Does my hobby count as a business?

  1. The biggest factor is whether or not you make a profit. In general, if you make more than $400 a year doing your hobby, it may be considered a business.
  2. There are other factors to be considered, though. The IRS lists out their criteria, which include whether you depend on the activity for your livelihood and whether the activity has made a profit in the past or appears likely to make a profit in the future.
  3. If your hobby is not a business, some of your hobby expenses may still be deductible.

2.     I am self-employed. Should I pay my taxes quarterly or annually?

  1. The quarterly system requires you to estimate your tax payments and do a little more paperwork but ultimately can help you bypass the anxiety of tax season sneaking up on you. It also will help you manage your savings so that will tax season rolls around, you know you have enough on hand to cover your taxes.
  2. You have to file quarterly if you as an individual expect to owe at least $1,000 in taxes for the year or owed more than $1,000 the year before.
  3. If you do not think you will owe at least $1,000 in taxes and you did not owe more than $1,000 last year, filing quarterly optional. If you trust yourself to set money aside all year for your taxes or if you have another job where you are withholding enough of your income to cover your self-employment tax, it might be easier for you to file annually.

3.     I just started my business. How do I manage my taxes?

  1. Keep track of anything you buy to get your business going This can include:
    • Office Supplies
    • Equipment
    • Employee lunches
    • Vehicle expenses
    In short, keep any receipts from any of your start-up expenses. The first year you start your business is potentially your biggest opportunity for tax savings.
  2. To deduct home office expenses, you must have a space that is solely dedicated to your work. Keep that space separate from your personal computer or hobby space.
  3. Include any fees associated with doing market research or consulting with attorneys or financial experts. Think about all the activities you do to set up your business.
  4. Keep track of vehicle maintenance expenses in addition to mileage. Maintenance and alterations to your vehicle (like advertising) associated with your business can be deducted.

4.     Are there any tax deductions self-employed people often miss?

  1. A lot of new businesses do not know that many advertising expenses can be deducted. The advertising or promotions must be related to your business, but special events, business cards, TV ads, and promotional flyers may all be deducted.
  2. Any food served at a promotional event can be fully deducted. It is not subject to the 50% limit for other business-related food costs.
  3. You can deduct 50% of food costs related to meals you have while traveling or meeting with others for business purposes.
  4. You do not have to have an internet or phone line solely dedicated to your business to deduct some of the costs. If you use your internet or phone line for both personal and business activities, you can calculate the percentage of time online or on the phone spent on business tasks and deduct that portion on your taxes.
  5. Any training costs related to your self-employment (e.g., certifications, re-certifications, workshops) can be deducted.

5.     Can I deduct my health insurance premiums if I am self-employed?

  1. You can deduct health insurance premiums if you were not eligible to participate in a health plan through another employer or through your spouse’s employer. If you provided coverage to your spouse or dependents under age 27, you can deduct premiums for them as well.

6.     What else can I do to be financially smart as a self-employed person?

  1. One of the biggest things you can do to help yourself out for this tax year and in the future is to start a self-employed retirement plan. Contributions to your retirement plan are deductible, which reduces the taxes you will owe this year and build up investment dollars for the future. Be aware of IRS contribution limits first, though.

Starting and growing a business is an exciting adventure, but too many people let tax season get the best of them. Be sure you sock some money away to cover your taxes or get familiar with the quarterly estimated tax system now.

If you are just starting a business or are seeing a lot of new growth, now is the perfect time to meet with a financial advisor in person. Even if you only meet once a year, expert advice is invaluable for the future of business. Taxes and other financials can be confusing and an advisor can help you find the smartest deductions and biggest tax-savers for you. Not to mention, the cost of tax preparation services is deductible.

At Crunch Consulting, we want to help you realize your dreams by laying a firm foundation for you to achieve them. Speak with one of our consultants today for a free 30-minute consultation.