Taxes and the Self-Employed: What You Need to Know

As full-time work becomes scarce and more difficult to find, an increasing portion of the workforce has turned to self-employment as a solution. The self-employed workforce includes such workers as contractors, freelancers, temporary workers, and small business owners. One source estimates that over 86,000 in the city of Chicago alone identify themselves as self-employed.

Along with self-employment comes tax responsibilities and issues that differ quite markedly from regular workers earning wages or salaries. For instance, while employees of companies normally have federal and state income taxes deducted directly from their paychecks, companies who pay self-employed workers do not deduct income taxes. This means that self-employed workers must pay estimated quarterly federal taxes to the Internal Revenue Service throughout the tax year. If you fail to do so, then you may be assessed penalties and interest for underpaying your federal taxes.

 

Taxes and the Self-Employed: What You Need to Know

Good record-keeping is essential for the self-employed

Next, as a self-employed worker, you have many deductions for which you may be eligible that are unique to self-employment. For instance, you can deduct many of your business expenses related to your self-employment, such as home office expenses, vehicle expenses, office supplies, business travel expenses, and the costs of tools used in your business, such as a laptop or fees for membership in a professional association. You also can deduct health care costs and contributions to a Simplified Employee Pension (SEP) plan for retirement.

Perhaps most importantly, you must keep excellent records for tax purposes if you are self-employed. This will make it much easier to do your income tax returns come tax time, and will help protect you in the event that the IRS or your state taxing agency singles out your tax return for an audit. You can minimize your tax liability due to your self-employment, but in order to do so, it is essential that you have receipts, cancelled checks, and other written documentation of your business expenses, preferably kept separate from your personal finances.

Mishandling of business tax issues can result in serious penalties. Chicago businesses of all sizes and types should consult an experienced tax attorney for assistance in any tax-related matter.