Filing taxes as a self-employed individual comes with unique responsibilities and potential pitfalls. At Tax Law Advocates, we understand the complexities of self-employment taxation and are here to help you navigate the process effectively. By being aware of common mistakes and understanding how to avoid them, you can ensure compliance with IRS regulations and potentially save money.

Understanding Self-Employment Tax Obligations

Self-employed individuals are responsible for both income tax and self-employment tax, which covers Social Security and Medicare taxes. If your net earnings from self-employment are $400 or more, you’re required to file an income tax return and pay self-employment tax. This is reported using Schedule SE (Form 1040).

Additionally, because taxes aren’t withheld from your income as they are for employees, you’re generally required to make estimated tax payments quarterly using Form 1040-ES. Failing to make these payments can result in penalties.

Common Mistakes and How to Avoid Them

1. Underpaying or Missing Estimated Tax Payments

Many self-employed individuals underestimate their tax liability or forget to make quarterly estimated tax payments.This can lead to penalties and interest.

Avoidance Strategy: Use Form 1040-ES to calculate and pay your estimated taxes quarterly. Keep track of your income and expenses throughout the year to make accurate estimates.

2. Mixing Personal and Business Expenses

Combining personal and business expenses can complicate your tax return and may lead to disallowed deductions.

Avoidance Strategy: Maintain separate bank accounts and credit cards for business transactions. Keep detailed records and receipts for all business-related expenses.

3. Filing Late

Missing tax filing deadlines can result in penalties and interest charges.

Avoidance Strategy: Mark your calendar with key tax deadlines. If you need more time, file for an extension using Form 4868, but remember that an extension to file is not an extension to pay.

4. Incorrectly Reporting Income

Failing to report all income, including cash payments and income reported on Form 1099-NEC, can trigger IRS scrutiny.

Avoidance Strategy: Report all income accurately, regardless of whether you receive a 1099 form. Keep meticulous records of all earnings.

5. Overstating Deductions

Claiming excessive or unsubstantiated deductions can lead to audits and penalties.

Avoidance Strategy: Only claim deductions that are ordinary and necessary for your business. Maintain documentation to support each deduction.

6. Math Errors

Simple arithmetic mistakes can delay processing and result in incorrect tax liabilities.

Avoidance Strategy: Use tax preparation software or consult with a tax professional to ensure accuracy. Double-check all calculations before submitting your return.

7. Incorrect Social Security Numbers or Names

Entering incorrect Social Security numbers or misspelling names can cause processing delays.

Avoidance Strategy: Ensure that all personal information matches exactly with your Social Security card.

8. Choosing the Wrong Filing Status

Selecting an incorrect filing status can affect your tax liability and eligibility for certain deductions.

Avoidance Strategy: Use the IRS’s Interactive Tax Assistant or consult with a tax professional to determine the correct filing status. 

9. Not Keeping Adequate Records

Poor record-keeping can lead to missed deductions and difficulties during audits.

Avoidance Strategy: Maintain organized records of all income, expenses, receipts, and relevant documents throughout the year.

10. Failing to File Required Forms

Neglecting to file necessary forms, such as Schedule C for business income or Schedule SE for self-employment tax, can result in incomplete returns.

Avoidance Strategy: Familiarize yourself with the forms required for your specific situation and ensure they are completed and submitted accurately.

Contact Tax Law Advocates for More Help

Navigating self-employment taxes can be complex, but by being aware of common mistakes and implementing strategies to avoid them, you can ensure compliance and potentially reduce your tax liability.

At Tax Law Advocates, we specialize in assisting self-employed individuals with their tax obligations. If you need guidance or have questions about your specific situation, don’t hesitate to reach out to us.