Self employed taxes can feel like a total headache, and the IRS is one scary entity you DO NOT want to mess with.
So how do you navigate paying taxes when you’re self employed?
How do you save money on taxes? What things can you report as tax expenses, and which expenses are a no-go?
In this episode, we’re talking to tax and finance expert Adam Knihtila (aka CFO Adam) on everything you need to know about paying taxes as a self-employed person. Adam took the time to answer ALLLLL the questions the Business Bitch audience had on taxes, and even took time to answer things in an easy-to-understand way, so that the world of self employment tax makes sense to even non-finance people. 🙋♀️
Download this episode to listen now or later, and refer to the show notes for a go-to version of all the tax and accounting stuff we talked about during this interview. (If you need links, scroll past the long outline of show notes to fine them! They’re there I promise!)
Things we talked about regarding self employed taxes & business finances:
- The basics of the basics to know about self-employed taxes before getting started:
- Talk to 4 people: accountant, lawyer, business banker, marketer
- Set up a business bank account (Adam talks about how to transfer money back & forth when needed)
- Tracking your expenses & using softwares to help you track your expenses so it’s not as hard
- Sole Proprietor vs LLC vs S-Corp
- The LLC itself doesn’t provide tax differences from operating as a sole proprietor (but it does provide some legal protection)
- LLCs start to give tax benefits depending on the LLC type: Sole Proprietor, Partnership, S-Corp, or C-Corp
- S-Corp Tax Benefits:
- Sole Proprietors pay: federal tax, state tax, self-employment tax (social security & medicare)
- S-Corp pays: pay federal tax & state tax, but self-employment tax is treated differently:
- As a corporation, you have to pay yourself a W-2 salary, so you only pay self-employment tax on your salary, and not on your shareholder distributions (This is where you save some money on taxes)
- You pay income tax (state & federal) on shareholder distributions, but not self-employment tax
- When you’re paying yourself a salary, make sure it’s a fair salary: regional pay, pay grade of your peers in the same industry, not earning minimum wage, etc.
- You don’t have to have a pre-set decided salary before switching to an S-Corp, but you do want to be making at lest $40,000 to $50,000 per year to make it worth it.
- What happens if your business loses money one year instead of making money?
- It’s not a huge deal: just do your best to turn it around ASAP: you’re allowed to show a loss for 2 years in a five year rolling window
- If you keep showing losses, you have to start showing your business as a hobby, but there ARE some exceptions: if you’re earnestly trying to make a profit & can show that, you’ll probably be okay. (Work with your accountant here just to make sure though.)
- Expense Tracking Questions
- Requirement for the IRS is that it’s an ordinary & necessary business expense
- Ordinary: something most people in your line of work would spend money on
- Necessary: you needed to spend the money to further your business
- Home office: regularly & exclusively used for the business, does not have to be an entire room
- Use tape to measure square footage to calculate percentage of house or apartment
- Can claim that percentage of everything related to your home: utilities, HOA fees, rent/mortgage, pest control, lawn care, repairs, real estate taxes, maintenance: NOT just the rent
- If you did some freelance work over the last year & this is your first year reporting self employed taxes, what do they need to take to their accountant?
- Profit & loss statement (ideal)
- Income & expenses, basically
- Paying taxes quarterly (estimated payments)
- Pay 4 times per year: April 15 (Q1), June 15 (Q2), September 15 (Q3), January 15 (Q4)
- To avoid a penalty, pay at least as much as you owed last year, and you won’t have to deal with the underpayment penalty
- Adam’s advice: set aside 1/3 of your revenue
- When do you have to file taxes by?
- Partnerships & S-Corps are due March 15
- C-Corps & Sole Proprietors are due April 15
- Payroll taxes are quarterly: April, July, October, January
- Accountants have a hotline to the IRS, so make sure you work with one!! 😱
- Forms you need to know & use:
- 1099-NEC (non-employee compensation)
- 1099-K (from your payment processor)
- His piece of advice to Business Bitch entrepreneurs: Ask. Questions. Ask. Questions. Ask. Questions.
The links you’re looking for:
- Check out this podcast episode & show notes on BusinessBitch.com
- CFO Adam
- WFH Financial
- Lawyer Podcast Episode – The Business Bitch Podcast with Jamie Lieberman of Hashtag Legal
- Payroll Podcast Episode – The Business Bitch Podcast with Pincus Schiff aka The Payroll Guy