My Friend Told Me I Could Write Off My Dog Food
Resources to Manage Your Tax as a Single Member LLC
We all pay tax on income we earn. If you work as an independent contractor, you probably have a lot of questions about how to track your income, how to estimate tax, and how to pay taxes.
If you provide a creative or professional service, work on demand or do freelance work you are self employed. Self employed individuals need to understand taxes; how to pay taxes and how to keep records for expenses that they can deduct. No taxes are withheld from your income, so you will need to pay quarterly estimated tax payments.
Let’s consider the elements of managing your taxes as an independent contractor:
Determine What Business Structure to Set Up
Your business structure determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. We recommend that you set up a Limited Liability Company (LLC) with your state Secretary of State. You can find more about what the Single Member LLC set up at the IRS website Owner of Single Member LLC. At this website you will also learn more about using an EIN (Employer Identification Number) or your SSN (Social Security Number) for opening bank accounts, etc.
Keep Good Records
Good record-keeping helps to avoid headaches at tax time. You have the burden of proof so you must be able to prove the expenses that you deduct.
Keep a mileage log to support your mileage deduction
Write the business purpose for all business meals
Take pictures of your home office
Keep copies of receipts in an electronic format such as an app like Receipt Bank or Expensify
How to Compute Tax
First, as an independent contractor you pay both income tax and self employment tax on your income. Before you can determine these taxes, you must compute your net profit or loss from your business. As a business owner, you are entitled to deductions for business expenses to reduce your net business income. When you are self employed you have more freedom and ability to deduct expenses than an employee.
Self employment tax is the same as Social Security and Medicare tax. As an employee you pay half of this tax and your employer covers half. When you are self employed you pay the entire 15.3% self employment tax.
You also pay income tax on your income. Income tax includes both federal and state income tax. Net business income is reported on a Schedule C on your personal income tax return.
IRS Publication Business Expenses has a good list of deductions you can take.
Here are some of the deductions you should track:
Business use of home
Business mileage
Business use of cell phone and internet
Business meetings
Qualified Business Income Deduction
Starting in 2018, business owners may be entitled to a deduction of up to 20% of their Qualified Business Income from a trade or business. The deduction is subject to multiple limitations such as the type of trade or business, and the total of your adjusted gross income. This new deduction provides a very nice benefit for self employed individuals.
How to pay your taxes
If you (or your spouse) receive a W-2 job and self employment income, you can choose to have more taxes withheld from your W-2 to cover taxes from your self employment income. Otherwise, you are required to pay estimated taxes throughout the year to avoid underpayment penalties. The IRS wants funds throughout the year and not just when you file your tax return.
When to pay — Estimated tax payments are due four times a year:
April 15 for payment period January 1–March 31
June 15 for payment period April 1–May 31
September 15 for payment period June 1–August 31
January 15 for payment period September 1–December 31
How to pay — Pay online or by mail or phone (refer to Form 1040-ES).
You must also pay taxes to your state. Look at the online options to pay estimated taxes to your state.
How to file your taxes
To file your tax return as an independent contractor you will include the following forms with your Form 1040, U.S. Individual Income Tax Return.