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8 Tax Mistakes Self-Employed Individuals Make

Accounting and TaxesJanuary 31, 2023

Being self-employed means you can set your own hours, work from home, and take on projects that interest you. After all, that's why millions of Americans took the leap into self-employment. However, it also means you're responsible for filing and paying your own taxes. For self-employed individuals entering their first tax season, this can be especially daunting. 

Self-employment taxes can be complex, and it's easy for self-employed individuals to make mistakes that can result in a larger tax bill or penalties. Minimize the potential for tax-time stress by familiarizing yourself with these common mistakes for self-employed taxes:

Mistake #1: Underreporting or underestimating income

One of the biggest mistakes self-employed individuals make is underestimating or underreporting their income. When you’re self-employed, you’re responsible for reporting all your income and paying taxes, even if it’s a side hustle. The Internal Revenue Service (IRS) has various ways to track income, such as 1099 forms from clients or peer-to-peer payment apps, bank deposits, and credit card transactions. So even if you don't report all your income, the IRS may still find out about it and may assess additional taxes, penalties, and interest. It's important to keep accurate records of all income received, including invoices, receipts, and bank statements.

Mistake #2: Leaving bookkeeping to the last minute

Clear and consistent bookkeeping is essential for self-employed individuals. Not only will it help prevent headaches come tax time, but it also provides insight into the health of your business, enables informed decisions, and prevents you from having to dig through a stack of papers or a shoebox of receipts.

Keeping good records is one of the most important things you can do to avoid tax issues. It's easy to get caught up in the day-to-day tasks of running your business such that you forget about keeping records for your taxes, but this is a big mistake. With proper records, it will be easier to stay on top of bookkeeping and determine how much income you've earned and what expenses you've incurred. Without good documentation, though, it will be hard to file your taxes accurately, which may lead to penalties and fines from the IRS. 

Mistake #3: Not paying quarterly taxes

When you’re self-employed, you’re required to pay taxes quarterly. Quarterly taxes—or “estimated taxes”—are tax payments that you may be required to pay throughout the year if you receive income that doesn’t have taxes already withheld from it.

All taxpayers pay taxes throughout the year as they earn income, but most taxpayers don’t have to worry about it because employers withhold a portion of their paycheck for taxes and send them to the IRS on their behalf. When you’re self-employed, you’re the one responsible for setting aside money and making those payments each quarter. 

Mistake #4: Missing important tax deadlines

Self-employed individuals must file their taxes differently than employees and have different deadlines. In addition to filing annual federal and state taxes, self-employed individuals must pay quarterly estimated taxes. Failing to file or pay self-employed taxes on time may subject you to late-filing penalties and fines. 

To avoid missing important tax deadlines, familiarize yourself with the tax calendar. Keep track of the due dates for your quarterly estimated taxes and annual tax return by setting reminders on your calendar.

Remember: While you can consider filing an extension if you need more time to file your taxes, an extension only extends the filing due date but not the payment due date. You’ll still need to estimate your taxable income and make tax payments based on it upon filing an extension.

Mistake #5: Overlooking tax deductions

A tax deduction is an expense that can be subtracted from your taxable income, reducing the amount of income on which you are taxed, and many self-employed individuals overlook the importance of these! While you can only claim expenses directly related to your business, each purchase you make for your business can be deducted if it is an "ordinary and necessary" expense. Every time you take a deduction, you lower your profit and lower the amount of income that you can be taxed on. The lower your income, the less you pay in taxes.

Many self-employed individuals don’t know the deductions available to them. In addition to business expenses paid from a business account, many self-employed individuals don't know some expenses paid from personal funds are available for tax deductions, such as vehicle expenses and home office deductions. Familiarize yourself with common tax deductions and keep good records throughout the year so can keep track of everything when April comes around.

Mistake #6: Not separating personal and business accounts

Not separating business and personal expenses is a common tax mistake for self-employed individuals because it can make it difficult to accurately determine which expenses are business-related and can be claimed as deductions on a tax return. When these expenses come out of the same account, you’ll find yourself sifting through pages of transactions to properly categorize business expenses ahead of tax deadlines. This can lead to accidentally overstating business expenses by including personal expenses as business expenses,  which can lead to errors on your tax return, resulting in a larger tax bill or penalties.

A separate business account eliminates this issue. When everything is listed in a single account, you can simply run down the list and add everything up (or have software take care of it for you). This turns a tedious, time-consuming process into one that takes just a few minutes.

Mistake #7: Forgetting to set aside money for taxes

Forgetting to set aside money for taxes is another common mistake made by many self-employed individuals, especially when it’s time to make their very first payment to the IRS. Without an employer to withhold taxes from their paycheck, it can be easy to forget to save money for taxes throughout the year. However, failing to do so can result in a large and unexpected tax bill.

To avoid this large bill, it is important to set aside money for taxes on a regular basis. A general rule of thumb is to set aside 30-35% of your income for taxes. This will ensure that you have enough money to pay your taxes. 

Tip: Set up automatic transfers to move a portion of your income to a separate account specifically for taxes. The automation will help it feel “out of sight”, reducing the risk of underpayment and avoiding last-minute scrambling to come up with the funds at tax time.

Mistake #8: Not knowing when to ask for help

Self-employed individuals wear a lot of hats, and tax professional isn’t usually one of them. You may not always have the time or expertise to fully understand your tax obligations, but this can lead to expensive mistakes. If your return involves a complex business structure, multiple types of income, or lots of unorganized receipts and documentation that you don’t have time to go through—and if you’re not feeling confident about filing on your own—this option is for you.

Tip: As tax season gets busier, the availability of tax professionals may become limited. You might find many professionals aren’t accepting new clients. Don't wait until it's too late to seek professional help. 

Take the guesswork out of taxes.

As a self-employed individual, you may be dealing with a lot of new and complex rules and regulations that can be difficult to navigate. But don't let that discourage you! Remember that even the most experienced entrepreneurs make mistakes when it comes to taxes. Common mistakes such as failing to keep track of expenses, not setting aside money for taxes, and not understanding deductions can be costly when it comes to filing taxes. 

The important thing is that you're taking steps to educate yourself and stay informed. Remember that every mistake is an opportunity to learn and grow, and that you're not alone in this journey. With the right mindset and the right business tools, you can navigate the tax process with confidence and success. 

The information on this website is not intended to provide, and should not be relied on, for tax advice.

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