Tax season is here again. For many, that means just adding up their W-2s, filing a quick 1040-EZ form and collecting a return.
It’s not quite that easy when you’re a gig worker, an independent contractor or somebody whose side hustle has started to turn a profit. Self-employment work always makes the taxes more complicated.
You want to avoid errors, but not pay more than you must
Small businesses and sole proprietors have unusual tax obligations so they get unusual tax breaks. Here are some of the most important ones to remember on your return:
- Subtract all business-related expenses: You pay taxes only on your net earnings from self-employment, not the gross. That means you can deduct the laptop you had to buy to do your writing gig, or the car washes you had to get to keep your car clean enough for your Uber job.
- Subtract the value of the home office: If you started your side gig from the spare bedroom and that’s become your office, you’re entitled to deduct part of your mortgage payments or rent, plus utility bills, maintenance costs and other expenses. (This deduction does not apply to people who are working from home as employees.)
- Deduct your health insurance premiums: If you had to pay for your own health insurance as a self-employed person, you can deduct 100% of those premiums from your taxes. (If your insurance comes through an employer, however, you do not get that deduction.)
- You can pay your child as an employee: This reduces your earnings and your child may not have to pay any tax on this income until they earn more than the standard deduction ($12,400 in 2020). Just be careful, because you can only pay your child if your child is actually working for you — and their work and pay has to be in line with their abilities.
A lot of self-employed people struggle with their tax returns. Sometimes, they don’t even file them and let their taxes fall behind because the whole thing feels overwhelming. Working with an experienced tax law attorney here in Naperville can help you find a strategy to get current and avoid further IRS problems.