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Self-Employment Guide
Self-Employment Income and Taxes
If you earn income in a small business (either full or part-time) that is not reported on a W-2 and/or you receive one or more Forms 1099-NEC for work you perform, you are technically self-employed, and this guide is for you.
Frequently Asked Questions Below
We've structured our guide with our most frequently asked questions regarding taxes, tips, tax deductions and limits. If you have any questions that are not covered below, please let us know!
We use our Self-Employment Organizer to collect your income and expense totals. When we prepare your return, we only need your totals by the categories shown on this organizer. We do not need to see or review your receipts, they are for you to hold on to just in case the IRS decided to audit your tax return. Of course, if you have any questions on the deductibility of an expense, please let us know.
If you have any questions as you review our guide, please let us know.
General FAQS
Please Contact Us if you have a question not covered here.
The best way to track your income and expense is the way that suits you best and will provide accurate totals for your tax return preparation. Below is the process we recommend to all clients as this offers an inexpensive, simple, and repeatable process.
- Separate Bank Account(s): Open a separate bank account for your business activities and if you use a credit card, use only one card for business transactions or consider opening a credit card just for business activities. This will keep your business and personal transactions separate so you can easily review your business transactions and account for income and expenses. If you have an LLC or S Corp, this is especially important to preserve your limited liability protections.
- Download and Classify Your Transactions: Once you have your separate business accounts, you can download your transactions as an Excel or CSV file and easily classify your business transactions by your preferred categories for your tax return preparation. When you are reviewing, all deposits are (likely) income and deductions are (likely) expenses. You'll of course need to review, but this gives you the total list of transactions to review and classify.
- Smart Phone - Calendar: Use your smart phone and a calendar app to track your business activities. Use the calendar app for your business appointments, mileage, meals, etc. At the end of the month, quarter, or year (whatever frequency you choose), you can go back and review your calendar to see what your activity has been and determine your deductible expenses and mileage.
- Smart Phone - Camera: Whenever you have a paper receipt, take a picture and immediately email it to yourself and save it in your email or online storage service (Dropbox, Google Drive, etc.), based on the tax year. If you save a digital copy of your receipt, you do not need to keep the paper copy as well.
- Business Email Address: You'll probably already use an email address for your business, so this is an easy tool to help keep you organized. You can create a folder per tax year and save your online purchase receipts, and as noted above, the emailed pictures of receipts for offline purchases.
Want help with your bookkeeping? Contact Us and we can make a recommendation for a bookkeeping service provider to help get or keep your organized.
We'll be honest here, taxes for the self-employed can be daunting. You have the following taxes to account for:
- Payroll Taxes: Payroll taxes are Social Security and Medicare. You will pay 12.4% for Social Security and 2.9% for Medicare, so about 15% in payroll taxes, which is on your net self-employment income (gross income less expenses).
- Federal Income Tax: This is the tax imposed on your total income for the year. Your federal income tax will depend on your marital status, as well as other income for the year, for example, your spouse's income, capital gains, dividends, etc. Most clients land in the range of 10%-30% or so for their federal income taxes.
- State and Local Income Tax: Most states impose an income tax on your total income. Maryland has both a state income tax and a local income tax wrapped up in the annual tax return. The income tax rates start at about 2% and top out at 5.75%. The Local tax is based on your county of residence. Most of the counties levy anywhere from 2.25% to 3.2%. Montgomery County charges 3.2%. Your estimated tax payments should account for both of these taxes per payment, so you will not make separate payments.
- Do you have employees? If you have employees, you will pay half of their payroll taxes. You will want to use a payroll processor like ADP or Paychex, to prevent costly errors in the payroll tax filings.
When you are self-employed, you must pay your income and payroll taxes on your own via quarterly estimated tax payments. If you don't make timely payments of at least 90% of your current year's tax liability or 100% (110% for MD) of last year's liability, you face the prospect of underpayment interest and penalties from the IRS and/or state.
Use these links below to make your estimated tax payments online or contact us to receive paper vouchers to mail in your estimated tax payments. Please note, you make have to register for an account if you have no done so previously.
Payments are due by the following dates
- 4/15
- 6/30
- 9/15
- 1/15 of the following year
Contact Us to help calculate your estimated tax payments to make per quarter.
The answer depends on your business complexity and if you have employees or not. The majority of self-employed individuals do not need QuickBooks or another software for their bookkeeping.
- What does QuickBooks do?: QuickBooks syncs with your business bank and credit card accounts and pulls in your transactions via the bank feed. Then you classify the transactions into the appropriate account. All of your transactions are totaled by category and you are left with a nice, neat Profit and Loss statement. This is 100% dependent on you knowing how to properly use QuickBooks. There is an entire cottage industry devoted to unwinding and cleaning up messy QuickBooks accounts, so there is plenty of room for error here. We only recommend QuickBooks for businesses that need an accounting software.
- If you run payroll, you may want QuickBooks: if you have payroll for yourself or employees, you will want to use QuickBooks or some other payroll service provider. The potential for errors, penalties, and interest are too high to pass on this sort of service.
- QuickBooks may not be necessary: If you are self-employed without complex projects, employees, a large number of contractors, or other complexities, QuickBooks is probably overkill for you. You can probably achieve the same or a better level of efficiency using Square and/or a payroll service like ADP or Paychex. Want to discuss your options? Contact Us and we can make a recommendation based on your business' needs that will help you save you time and money.
- Already have QuickBooks? You can share your QuickBooks with us: This is a nice feature - you can share your bookkeeping with us or any other accounting professional if the need arises. Come tax time, this can greatly simplify your tax preparation.
- Need help with your QuickBooks? Maryland Tax Service, Inc does not offer bookkeeping services at this time but we can refer you to an appropriate service provider.
As a self-employed person, you have some great retirement options that not only help you save for retirement, but will also help lower your tax bill for the year. We have the most common options below.
Please note: the contribution limits are based on your net income, so please contact us with any questions.
- Solo 401k: This option lets you put away up to the annual maximum amount into a Solo 401k account. The annual maximums are $20,500 for 2022 and $22,500 for 2023. There is also an employer side match, based on net income, which can bring your total contribution to $61,000 for 2022 and $66,000 for 2023.
- Simplified Employee Pension (SEP) IRA: This option is based on your self-employment net income, up to 25% of your net income or a maximum of $61,000 for 2022 and $66,000 for 2023.
- Catch up Contributions: If you are over 50 years old, you can make an additional catch up contribution of $6,500 in 2022 and $7,500 in 2023.
You can setup a free retirement account with custodians such as Fidelity or Vanguard, or we can recommend a financial advisor if you are interested in professional guidance with your retirement/investments.
Deduction Specific FAQS
Please Contact Us if you cannot find an answer to your question.
According to the IRS:
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.
Our position is this: If you have an expense that you would expect to see in a competitor's business, it's likely deductible. See our list of Deduction Exceptions below that are not deductible since the IRS limits some deductions.
You can see the typical expense categories on Schedule C on our Self-Employment Organizer. You will use this organizer to send us your totals for your business.
Deduction Exceptions
- Charitable donations: not deductible by your business but may be deductible on your Schedule A if you itemize your deductions
- Gifts to Clients: you are limited to $25 per gift per client
- Meals and entertainment - see "Are business meals and entertainment deductible?" FAQ
Business meals are 50% deductible, which has been the longtime standard.
Entertainment (like sports tickets, concerts, etc) is not deductible. If you have a mixed event with both meals and entertainment, you must itemize the expenses and exclude the entertainment portion from your deduction.
Business Meals -- 50% Deductible
- Business meals with new or existing clients
- Office snacks for employees, while working
- Meals while traveling for business
- Meals while attending conferences or meetings to discuss business
Business Meals -- 100% Deductible
- Meals for employees for the convenience of the employer (e.g., working late)
- Food provided to the public for goodwill (e.g., coffee, snacks)
- Meals during company wide recreational events or team-building events
As a self-employed person, you can use actual meals expenses or the per diem rate when traveling. Generally, you can only use per diem for meals where your travel takes you 50+ miles from your home and/or away from home for 12+ hours.
Like all other business expenses, you should document the per diem meal expense as part of your business travel, which should include the business purpose, destination, dates, and any other travel related expenses like mileage, airfare, lodging.
If you drive your vehicle for your self-employment, you are entitled to a deduction. You choose one of the options below.
Mileage Log: Please note, both options require that you maintain a written log of your business vs personal miles. An easy way to do this is record your mileage at the start of the year, record all business mileage as you go, and then record your year-end mileage. The difference between these three amounts will provide you with your business vs personal mileage.
- Mileage Option: your deduction is based on the number of miles you drive and the IRS mileage rate. This is by far the simpler method of the two.
- Actual Expenses: your deduction is based on actual expenses, so you must track your total vehicle expenses for the year: fuel, oil changes, all maintenance, insurance, wash and wax, tires, interest if you have a car loan, and any other expenses you actually pay. From there, you provide us with your mileage totals and we do the rest. We will also factor in a depreciation deduction for your vehicle, as applicable. Once you elect this method, you cannot switch to the Mileage option. When you sell or trade in your vehicle, you will have a taxable gain on the sale of the vehicle. This is certainly the more complex option, but it may offer a larger deduction.
We use the mileage rate for most clients. Unless you use a heavy truck or van in your business, the Mileage option is simpler and does not have the complexities of a taxable gain at the sale or trade-in of your vehicle.
If you use part of your home regularly and exclusively for business, you may be able to claim the home office deduction.
Please note: this only applies to self-employment income. If you are a W-2 employee and do not have self-employment income, this does not apply to you.
The requirements to qualify for the home office are:
- Regular and Exclusive Use: You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
- Principal Place of Business: You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
There are two options for the home office deduction
- Simplified Method: $5 a square foot for the space you use for business, up to 300 square feet.
- Regular Method: You essentially total of your home expenses and prorate your deduction based on business vs personal square footage and take a depreciation deduction.
The IRS defines travel as: "Travel expenses are the ordinary and necessary expenses of traveling away from home for your business." This includes the costs to get to an from your destination, lodging, meals, and any other business related expenses.
When you travel for business, you must ask yourself, what is the primary purpose of the trip?
- Primarily business: You can deduct all of your travel expenses if your trip was primarily business related. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination (e.g., seminars, lodging, business meals, etc).
- Primarily personal: If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business.
- Other travelers: If your partner, spouse, and/or children travel with you, their travel costs are not deductible
Clothing deductions will be quite limited unless the following deductible exceptions apply:
- Clothing with your brand or logo
- Specialized clothing that you wear exclusively for your business, but would not wear outside of your business activities. Common examples might include items such as scrubs for medical professionals, theatrical costumes, specialized safety clothing, etc.
- Cleaning expenses for specialized clothing is deductible, but typical dry cleaning and other cleaning costs for other ordinary clothing would not be considered a deductible expense.
Common questions about clothing often include items of professional business attire, such as dress shirts or suits. Since these clothing items are not specifically branded and can be worn outside of business, these items are not deductible.