5 Myths of Self-Employment Taxes
If you receive a 1099 for your income, then you are self-employed. Since you do not have an employer withholding taxes for you, it is your responsibility to pay taxes on that income. Here are some common myths around what you need to do when it comes to taxes on that self-employment income.
Myth #1: You Must Hoard Receipts
There's a common belief that you need to have a receipt for every tax deduction claimed at the end of the year. Some people have overflowing glove compartments, shoeboxes, and grocery bags full of them from years and years ago.
While it's true that receipts used to be the only valid form of proof, that is no longer the case. The truth is that the IRS considers bank and credit card statements completely legitimate forms of records for the vast majority of tax-deductible expenses. The only exception is if you're buying things with cash for over $75 (under $75, you don't need one).
So don't worry about hoarding all those receipts. We live in the 21st century! Any credit card purchase of other digital transactions are already recorded online, constituting completely legitimate proof of purchase.
Myth #2: You Must Track Miles
If you drive a car for your 1099 or freelancing work, you can claim deductible car expenses on your taxes. While it's true that tracking your miles gets you 58 cents back per mile, it's also a big hassle and requires you to constantly classify or note down trips and their purposes.
Tracking miles is probably going to cost you money on your taxes. On average, people who drive less than 20,000 miles per year for work get a bigger tax break by claiming car expenses than mileage. So, unless you're an Uber driver or otherwise work a very travel-intensive job, you don't need to be tracking miles.
Myth #3: A "Home Office" Must be a Separate Room
Not all of us have a large, many-bedroom house where we can claim an entire room as a home office. However, that doesn't mean you can't claim the home office deduction. Simply ensure that you have a workstation located somewhere in your house or apartment where you do work and don't watch Netflix or other personal activities. Then, you can claim a portion of all your housing expenses as a tax write off!
Myth #4: Only Full Time Freelancers Should Claim Tax Write Offs
False. We get this question a lot from part-time 1099 contractors / freelancers. The truth is that the standard deduction does not trade off with itemizing 1099 work expenses. It's additive — meaning that you can claim both! That means even if you have a full-time W2 job and only do limited part-time 1099 contracting work, neglecting to claim work expense tax deductions is like donating money to the IRS!
Myth #5: Quarterly Tax Payments are Optional
Quarterly taxes, also known as estimated tax payments, are required for all contractors and freelancers. Not paying them means you'll owe a penalty that increases for every month that the payment is delayed.
The good news?
Filing your quarterly taxes is a lot easier than you might think. It just takes
5 min and doing so means you'll avoid a nasty penalty from the IRS. The easiest
way to do it is to assume a 25% effective tax rate on the 1099 contracting /
freelancing income you earned during the quarter. It gets even easier if you
were doing the same contracting / freelancing work last year because in that
case you can just pay a quarter of your last year's tax payment. That's it.
If you would like to receive more information on making smart money moves for your future, be sure to contact us today!
