12 Self-Employed Tax Tips From The Experts That You Should Check Out If You Have 1099 Forms

Get ready for a few more complications.

Ah, self-employment. It's all fun and games until tax season hits and you have no idea what you're supposed to do (or should've been doing all of 2021).

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Take it from me, a self-employed writer and editor who avoided all that scary tax stuff as long as possible. These days, I've embraced it (as much as one can really embrace taxes) and tried to share what I've learned with fellow freelancers, contractors, and self-employed people.

To guide us weary workers, I chatted with a couple tax experts who shared everything self-employed workers should be doing (or start doing now to make next year's taxes a whole lot easier).

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I tapped Kemberley Washington, a tax analyst at Forbes Advisor (and former IRS agent), and Dan Demian, a financial advice expert at Albert — a banking app that also provides users with high-quality financial advice.

1. Separate your work expenses from your personal expenses. (Hint: Opening a work-specific credit card and bank account helps a lot.)

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It took me a long time to get on board with this one but now that I've made the transition, I'm hooked. 

Demian confirms that you should "make sure to separate business and personal expenses to track your finances efficiently. That means separate checking, savings, and investing accounts, with the same going for credit cards."

I've found that by putting my work expenses on a dedicated "work credit card," I don't have to go through my credit card bill every month and separate work charges from personal ones. And by setting up a work-specific checking and/or savings account, I can easily pay my monthly work credit card bill using work income.

2. Track all your work expenses using an online accounting software.

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You may be used to keeping track of things the old-school way (or not at all), but Washington says, "The best way to track expenses is using an online accounting software program. Online accounting programs have their advantages over manual systems, since you’re able to access them no matter where you are."

Remember that work-specific credit card and bank account from #1? They should be routed to the online accounting software you choose (I personally use QuickBooks). From there, all you have to do is review the line items (both expenses and income) and categorize them. The software tallies things up and lets you know where you stand in terms of business income and spending.

3. And don't forget to keep your receipts!

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I suck at this but Washington, who was an IRS agent 😬, says, "Be certain to track income and expenses but, more importantly, ensure you keep up with your receipts in case of an audit."

Demian suggests that you "have a folder on your computer specifically for these items, a separate folder in your email for email receipts, or a folder where you record your paper receipts every month."

To keep this from becoming overwhelming, Demian says you should "get into the habit of consolidating and reviewing your expenses every week (daily if you can) so you're not overburdened when it comes to filing your taxes."

4. You should set aside a portion of every paycheck — around 30% — to cover what you'll owe come tax season.

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When you're employed by a company (as a W2 worker), every paycheck you get has a chunk of money already taken out. That chunk includes income tax and contributions toward Social Security and Medicare. But when you're self-employed, a $500 job equates to $500 in your pocket (i.e., no taxes are taken out).

But, of course, the government still wants its cut, which is why self-employed people need to put aside money to cover their income tax and the 15.3% self-employment tax (a tax consisting of Social Security and Medicare taxes).

"As a self-employed individual, at a minimum, you'll want to set aside 15.3% plus the amount designated by your tax bracket. Federal tax brackets range from 10% to 37%. A good rule of thumb would be to set aside at least 30% of each paycheck, understanding that your year-end bill can be lower or higher, depending on your final income, deductions, and situation," said Demian.

5. And instead of paying taxes in one chunk in April, you'll need to pay your taxes quarterly.

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If you expect to owe at least $1,000 in taxes, the IRS asks that you pay your taxes (income and self-employment tax) quarterly. Often called "estimated quarterly taxes," these quarterly payments are based on what you expect to owe in taxes for the year. The due dates for estimated quarterly taxes are:

- April 15 for income made Jan. 1–March 31

- June 15 for income made April 1–May 31

- Sept. 15 for income made June 1–Aug. 31

- Jan. 15 (of the following year) for income made Sept. 1–Dec. 31

You can pay these four installments several ways (see here for the full rundown). I personally use EFTPS.

6. Since you'll be paying your quarterly taxes before tax season, you'll have to figure out how much you'll owe. This is how to figure it out.

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It's the ultimate Catch-22: You have to figure out what you'll owe in taxes (and start paying them) before you'll know how much you'll make that year. Oh, self-employment, how I love thee.

Here's how to figure it out:

- You can use Form 1040-ES to figure out your estimated quarterly taxes based on income you made the previous three months.

- You can rely on your accounting software to give you a quarterly number.

- And finally, Demian says, "If your self-employment income is reasonably consistent, individuals typically use their last year's assessed taxes to determine how much to pay." So if in 2020, you owed $15,500 in taxes, you just have to pay that same amount over the course of 2021 (in quarterly installments, of course). 

7. Keep in mind that if you underpay your quarterly taxes (or don't pay them at all), you may be penalized.

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"Unless you have a qualifying reason, if you underpay your estimated quarterly taxes, you may face a penalty from the IRS. If you owe more than $1,000 and didn't pay quarterly taxes at all, you might face an underpayment penalty by the IRS," explains Demian.

According to the IRS website, you can avoid these penalties if you pay "at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller." (See #6 for more information on the latter.)

As you might guess, if you overpay, no biggie. But you'll need to apply for a tax refund.

8. There are a few things many self-employed people forget to deduct. Healthcare payments are a big one.

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It isn't all bad news and complicated rules for self-employed workers. There are a lot of things you can write off, including those pricey health insurance premiums.

Washington says, "Self-employed health insurance premiums are often overlooked. If you’re self-employed, you can claim a 100% deduction of health insurance premiums paid for yourself, your spouse, and your dependents." 

9. And don't forget to deduct things like credit card interest, your home office, training and education, and more.

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To keep your estimated quarterly tax payments low, make sure you take every tax deduction you qualify for. 

Washington says a few you won't want to miss include "credit card interest (purchases that are necessary for the operation of the business); home office deduction (rent, mortgage interest, insurance, etc.); training and education expenses (work-related tuition, books, supplies, etc.); business mileage (if you use your car for work); and certain types of taxes like real estate taxes, sales taxes, and certain state and local income taxes."

10. Plus, this year, you can deduct what you paid for food and beverage at restaurants in full.

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Previously, self-employed filers could only deduct 50% of their work-related restaurant meals (taking a client out for dinner, for example), but Washington notes that for the years 2021 and 2022, "You can take a 100% deduction for restaurant meals."

Just a little added initiative to eat well (and support local businesses).

11. If you're looking to lower your taxable income this year, you can max out your retirement contribution.

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If it looks like you're going to pay way too much in taxes this year, you might want to start figuring out ways to lower your taxable income. One way is to max out your retirement contribution for tax year 2021 (you have until you file your taxes to do so).

"Doing so not only helps you save for retirement but can also reduce your tax liability. For the tax years 2021 and 2022, the maximum contribution for a traditional [IRA] is $6,000, plus another $1,000 for people who are 50 years old or older. Your contributions to a traditional IRA are tax-deductible," Washington explains.

If you've already filed your taxes or maxed out your retirement contribution, you might want to come up with a plan going forward. Any money you put in a traditional IRA will lower your taxable income for that tax year.

12. And if all of this feels scary and overwhelming, don't worry. There are plenty of tax experts who specialize in filing for self-employed people.

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You're not alone. No, really, you aren't. There are people whose job it is to know all these complicated ins and outs, including those who specialize in filing for self-employed people. 

My recommendation is to ask your fellow freelance friends what they do or look up a local CPA who can help you make sense of everything. I had a tax preparer file for me for four years before I started doing so myself. For me, it helped to have an example of what forms I'm supposed to submit and what deductions I can expect.