- Determine if you need to pay taxes.
- Decide who will do them – you or a tax professional.
- Collect your paperwork.
- File your taxes or send them to a professional.
- Plan for next year’s self-employment taxes.
Determine if you need to pay taxes
For most people, it will be very clear if you need to pay taxes: if you are self-employed and earning a living, the IRS wants some of that.
On the other hand, if you are starting your business and have barely earned a cent, then probably not. According to EFile.com, “If your total self-employment income is at least $ 400, you will have to file a tax return.” It adds, if there is any confusion, that it is different than whether you are an employee and these payments are automatically withheld from your salary and paid to you by your employer.
But generally, if you are working for yourself and have earned a living in 2020, you will have to file a tax return in 2021.
This is a decision that anyone needs to make their taxes every year. Still, if you are self-employed recently and have always done your own taxes, keep in mind that there are good arguments for hiring a professional rather than doing it on your own. After all, when you are an employee, your taxes are removed for you, and you may not have Complicated financial situation.
How much it will cost to hire a tax professional varies. According to the most recent report from the National Society of Accountants, 2018-2019 Income and Fee Survey, most people will pay about $ 10 to a tax professional to prepare Form 1040 and return the state with no itemized deductions. . If there is a deduction, on average, you will pay $ 294. Given that a self-employed person’s tax will often be more complex than average, your costs may be slightly higher.
Take your paperwork
A certified public accountant, spokesperson for Turbotax and contributor to the US News My Money blog, Lisa Green-Lewis says, “Before you start filing, be sure to collect and report all sources of income, including all 1099 forms. If you are on your own. — Unemployed, whether working as a freelancer or working a side gig, you will need to look for a new Form 1099-NEC starting in late January that will cost you $ 600 Or was paid more. “
It is important to note the new form, if you are used to fill out Form 1099-MISC.
“Form 1099-NEC replaces Form 1099-MISC that previously reported self-employment income,” Green-Lewis says. “Form 1099-MISC is still nearby, but will not be used to report self-employment income. If you accept payment through a third-party provider, you may receive a Form 1099-K Is, have more than 200 transactions and earn more than $ 20,000 “
Green-Lewis states that even if you do not receive 1099, “Under these limits it is important to keep a careful record and track all income because you still need to report all income, even if you have received the forms Whether or not. “
A lot can gather depending on your job. You may have expenses such as computer equipment or printer ink. You can drive a lot and may need to track your mileage. You will probably be able to cut a decent amount of medical expenses.
“And don’t forget about the home office deduction, which is one of the biggest deductions for self-employment because it is a portion of your expenses based on your rent, mortgage interest, property taxes and a percentage of space like utilities. You Use the home office for, ”says Green-Lewis.
Joshua Zimelman, president of Westwood Tax & Consulting LLC in Rockville Center, New York, says, “Employees have limits on what expenses they can cut, but if you’re an independent contractor or freelancer, you can Cut many business expenses. For example, for a Lyft or Uber driver, this may include gas, parking fees, car maintenance and repairs, auto insurance, and any other expenses for your car. “
On the other hand, if you have a business where you are very short on your computer, rarely buy equipment and never move out of your home, you may not have much to cut.
And Zimmelman says that what they can cut to border employees could be even more impressive this year. If you are an employee who was guided by an employer that most of the working from home could spend 2020 due to the epidemic, and you are expecting a deduction or tax breakdown, then you are unfortunately out of luck. Huh.
“Employees cannot cut any expenses related to employment,” Zimelman says. “Despite many people working from home in 2020, a new desk chair or curved flat screen monitor can’t be written off if you’re an employee. We’ve raised many questions about this, when I would have shared the rules It is frustrating if I am. “
File your taxes or send them to a professional
This is a very self-explanatory step in the process. Just make sure, if you are doing your taxes, allow yourself enough time to do them. If you have a few days, or even weeks, until April 15, 2021, the deadline, and you can spend time preparing your taxes without looking at the clock, you’ll be less inclined to make errors.
Next year’s self-employment tax scheme
This is where you will really do yourself a favor for the next year. Now start preparing for your 2021 self-employment taxes.
“Each year, some new clients come to me with self-employment issues. The most common is a failure to pay estimated taxes,” says Beth Logan, a Massachusetts, nominee agent and owner of collateral tax advisors.
Says Logan: “Self-employed people are required to pay their federal income tax, their state income tax – if any – and their Social Security and Medicare contributions. Self-employed people are both employers and employees. Therefore, they are part of both Pay. Social Security and Medicare contributions (called self-employed tax or SE tax), which is 15.3% of the profits up to the Social Security income limit. “
It says “When you include SE tax, federal income tax, and state income tax, the arrears can easily range from 25% to 40% for middle-income Americans,” Logan says.
If you’re not ready for this, Logan says, it can be very shocking to find out what you owe the IRS.
She says that estimated taxes should be paid quarterly – April 15, June 15, September 15 and January 15.
So if you are self-employed and feel that you were not ready to pay your taxes this year, then start working next year while you are in a proper financial mindset. Your future will thank you.