Tax Advice For Freelance Workers,
Independent Contractors, Self-Employed People, Sole Proprietors
If you've left your traditional salaried job to be a freelance consultant, you probably have lots of tax-related questions. Here are the ones I hear most often:
Records You Need to Keep for Taxes
The best way to pay the lowest possible tax is very low-tech: keep track of all of your business expenses! If you avoid paying with cash, and use one checking account and one credit card for all of your business activity, it will be easier to capture all of your tax deductions.
You need to keep your bank & credit card statements, and other business records for at least 5 years. Here is more information about document retention.
You also need to keep track of the business-related miles you drive your car. In 2020, the standard tax deduction is 57.5 cents per mile, which can add up to a large tax deduction. You may be able to claim more based on your actual car expenses. You can keep your mileage records in whatever format you choose: on your phone, on your desk top, in a little calendar book in the car. The important thing is to keep it up as the year goes along. The IRS regulations state that your car mileage records must be kept "contemporaneously" but doesn't define that term.
There is no list of tax deductions, only suggestions. The test question is this: Is the expense "ordinary" and is it "necessary"? "Ordinary" means that other people who do what you do also have this expense. "Necessary" means that this expense is important for the successful operation of your business. If your expense is both ordinary and necessary, it's a tax deduction. I encourage my clients to tell me about all of their expenses so that we can discuss any borderline items. Here is a list of common business expenses (called a "chart of accounts")
How Do I Pay My Taxes?
When you were working for a paycheck, things were simple. Taxes were deducted from your pay before you received the check. And you split the cost of social security and Medicare with your employer; they paid half and you paid half. Now that you're self-employed, you will pay 100% of the social security contribution, or "self-employment tax". For many people just starting their consulting careers, the self-employment tax is much more than their income tax and comes as a shock. It works out to about 14% of your net profit! So it's even more important to capture all of your business deductions.
The income tax and the self-employment tax are paid together.
More information on calculating and paying your quarterly estimated tax payments.
If you would like to discuss your personal situation with an experienced CPA tax accountant, please call or email me.
Bess Kane, CPA