For those who wish to become their own bosses, there are now more opportunities than ever. Careers in real estate, agriculture, design, consulting, and skilled trades such as painting and construction all offer excellent return on investment, factoring in required education, expected growth, and median income.
For those who seek a “for right now” job, or perhaps wish to supplement their income, gig work is a tremendously popular option, one we recently covered in detail. Very likely, the legal definitions pertaining to gig workers will evolve in the coming years, so watch this space!
Whether self-employment is a full-time or part-time hustle, whether the occupation is highly paid or barely paid, workers need to know their obligations and allowances come tax time.
To this end, the IRS hosts a helpful page for those who are new to business ownership or self-employment. For anyone who received a 1099 this year (another topic I’ve covered previously), the government will have the same information, so be sure to report those earnings on the 1040. Same goes for earnings not reported on a 1099. This includes payments received through apps like Venmo, in cash, or otherwise “under the table”. It’s all income, and the IRS wants their cut.
Oh, say can you C?
Self-employed filers who find themselves saddled with an unexpected tax obligation may find the Schedule C to be a helpful tool for alleviating the burden. This form should be filed by any business owners or “sole proprietors” (a term that differentiates them from corporate partners or shareholders) to report business profits or losses on their 1040. The Schedule C may be used for all kinds of deductions, including material, labor, vehicle, and transportation costs.
Rideshare drivers, track those tax-deductible miles! If you independently contract for Uber, Lyft, or similar, the app should provide a summary of miles driven while on-call, even when circling the airport waiting for a pickup request.
For new business owners, there may be a start-up deduction available. If the business incurred expenses for repairs, insurance, rent, supplies, or utilities, that’s deductible too. Business-related professional development, membership dues, ad fees, credit card interest, and website costs are all worth listing. Certain filers can even claim a deduction based on the square footage they use for home office space. Also worth noting that many small-business owners and self-employed earners are eligible for a hefty deduction based on 20% of their qualified business income (QBI), a provision that’s been in effect since the 2018 tax year.
If you paid for your own health insurance, that may be deductible, but don’t report it on the Schedule C. It’s a personal expense, not a business expense, so it belongs on the 1040 Schedule A.
Retirement contributions are potentially the most rewarding tax write-off, so long as they’re done right. Whether contributing to an IRA or a 401(k) — yes, self-employed workers can contribute to a 401(k)! — the set-up and reporting can get complicated. Well worth hiring a financial consultant, especially if the business is contributing also towards the retirement of employees.
Get it right the first time
Anyone whose income came in part or in full from self-employment must be aware of the documentation needed at tax time. Correctly calculating and reporting income will help ensure the correct tax is paid each year, and maybe even present a tidy windfall in the form of a tax refund.
In addition to short-term wins like tax refunds, accurate tax filing is also instrumental to longer-term wins, like securing a home loan. Loan applications, legally and logistically, are a more onerous process for the self-employed. Baleen Lending is closing that gap by applying add-backs aligned to mortgage lender guidelines for deprecation, depletion, and other deductions on a Schedule C that might otherwise be overlooked. This helps lenders report more accurate and potentially higher incomes for their self-employed borrowers. That higher income can equal a higher loan amount — a major win for both the borrower and the lender!
Sam Campeau blogs about all things pertaining to finance and technology for Baleen Solutions. In his free time, he watches the whales swim from his tiny fishing town in the Pacific Northwest.
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