Frequently Asked Questions about Self-Employment and Taxes

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Self-employment offers many benefits, but taxes can seem like a bigger burden. Here are some FAQs with detailed answers.

Key takeaways:

  • Eight self-employment tax FAQs:
    1. Am I considered self-employed by the IRS?
    2. What is self-employment tax?
    3. Do I have to pay quarterly taxes?
    4. How do I figure out how much to pay quarterly?
    5. How do I pay quarterly taxes?
    6. Do I still have to file an annual tax return?
    7. Can I take the home office deduction?
    8. What business expenses can I deduct?

When individuals take the path of self-employment, they gain flexibility and can pursue what they’re really passionate about. But many new entrepreneurs quickly get into headache territory when tax season rolls around. And self-employed workers have to worry about taxes all year long, not just in the spring. 

You likely have questions about self-employment taxes if it’s your first time trying to understand how it all works. Here is a list of the most common questions (and answers!) concerning self-employment and taxes:

1. Am I considered self-employed by the IRS?

The IRS outlines specific guidelines for workers to be considered self-employed, including the following:

  • You are a sole proprietor or independent contractor carrying on a trade or business
  • You are part of a partnership carrying on a trade or business
  • You have a part-time business or are otherwise in business for yourself

Self-employed individuals are not regular employees of a company who receive a W-2. Instead, you’ll typically, though not always, receive 1099s from the clients you do business with that report your income. Income received through a third-party payment processor (such as PayPal or Upwork) may not generate a 1099 unless specific payment and transaction thresholds are met—but self-employed individuals must still report this income.

2. What is self-employment tax?

When you work for a company, taxes are withheld from your paycheck to cover Social Security and Medicare taxes. Further, an employer pays half of this burden. This doesn’t happen when you earn money on your own, so you’re required to pay the total self-employment tax to cover these obligations. 

The self-employment tax rate is currently 15.3%, which consists of:

  • 12.4% for Social Security
  • 2.9% for Medicare

This tax is in addition to the income tax you pay on what you earned. Fortunately, you’re allowed to claim an income tax deduction for half the self-employment portion when filing a tax return.

3. Do I have to pay quarterly taxes?

Estimated quarterly taxes are something you need to become familiar with as a self-employed worker. Because you don’t have an employer making regular tax payments along with paychecks throughout the year, you have to pay them yourself. 

They’re called “estimated taxes” because you can really only estimate what you’ll end up owing for a year. They are paid quarterly by the following dates:

  • April 15
  • June 15
  • September 15
  • January 15

These dates may vary slightly from year to year, so always check the IRS website. For instance, for 2022 taxes, the first payment is due on April 18, 2022, and the last on January 17, 2023.

If you earn money throughout the year from self-employment and fail to pay sufficient estimated taxes each quarter, you’ll incur a fee from the IRS. 

4. How do I figure out how much to pay quarterly?

Estimated quarterly taxes are usually determined by last year’s income. But you can also estimate what you will make in a given year and must pay at least 90% of the actual, eventual total to avoid a penalty, though the IRS has lowered this threshold in some tax years. First, you’ll need to know your tax bracket for the applicable tax year, which tells you the percentage of income tax you pay plus the 15.3% self-employment tax.

So, say you bring in $80,000 in gross self-employment income, and you are a single filer. You would pay a 22% tax rate, totaling 37.3% for all your tax obligations for the year. So, on its face, you would then divide your expected income for the year by four and pay that percentage each quarter.

However, remember that you will have deductions to take that significantly lower your income. You’ll deduct all the business expenses you think you’ll have for the year from your total annual income and then also may take the standard deduction, which is $12,550 for single filers for 2021. So you end up paying a lot less in quarterly taxes after all these deductions since your income is substantially lower.

IRS Form 1040-ES helps calculate estimated quarterly taxes, so read through those instructions for a more detailed guide to calculations. 

When you file an annual tax return, you’ll receive vouchers from the IRS with estimated payments you can make for the following year’s quarterly taxes based on your income from that year. Don’t forget to also pay quarterly taxes to your state, in addition to federal taxes.

5. How do I pay quarterly taxes?

Use Form 1040-ES to pay quarterly taxes. You can also pay them by sending your payment with the vouchers you received from the IRS.

The IRS also has an easy online system—the Electronic Federal Tax Payment System (EFTPS)—that allows individuals to pay quickly. And you can make a quick online payment using Direct Pay from your bank account.

6. Do I still have to file an annual tax return?

Yes! If the net earnings from self-employment activities were $400 or more, you’re required to file an income tax return. You will report all actual income based on the 1099s and other tax forms you receive as well as all of your business expenses. You’ll either have to pay additional tax based on how much you paid quarterly or get a refund if you overpaid.

7. Can I take the home office deduction?

If you use a portion of your home for your business, you may be able to take the home office deduction. You must use the space exclusively for the business and on a regular basis, and it must be your principal place of business. For 2021, the simplified deduction method involves calculating the square footage of your office and multiplying it by $5. The maximum allowed is 300 square feet.

8. What business expenses can I deduct?

According to the IRS, business expenses need to be “both ordinary and necessary” to qualify. This means they are common and accepted in your industry and are helpful and appropriate for your trade or business. The most common deductible business expenses are:

  • Office supplies
  • Home office 
  • Health insurance
  • Automobile costs
  • Loan interest
  • Utility costs
  • Startup costs
  • Advertising
  • Business insurance 
  • Self-employment taxes
  • Continuing education
  • And others

The qualified business income (QBI) deduction is a newer benefit that allows you to write off a portion of your business income. If your total taxable income is $164,900 or below for single filers, you may qualify for the 20% deduction in 2021.

Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.

What Business Startup Costs Can I Deduct?

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New business owners have a lot of startup costs to worry about, from rent and payroll to advertising and research. Here’s what to know about deducting these expenses from your taxes.

Key takeaways:

  • Understand fixed versus variable startup costs, like rent and utilities versus designing a logo or a down payment.
  • Startup costs that qualify for a deduction include advertising, travel, employee compensation, professional fees, and more.
  • You can deduct $5,000 in startup costs in the first year, as long as your total startup costs are $50,000 or under.
  • Remaining startup costs can be amortized over a 15-year period.
  • Use IRS Form 4562 for amortization reporting.

Starting a new venture, while thrilling, comes with a whole new set of financial burdens, stressors, and compliance considerations. The cost of starting up in the first year will vary significantly based on what you’re shooting for and your industry—estimates range from $3,000 to start a microbusiness to around $40,000 for a typical startup in actual expenses incurred.

But the good news is that you can deduct some of these startup costs on a tax return. The IRS outlines certain qualifying startup costs, including typical expenses paid for creating an active trade or business or researching one. 

IRS jargon and guidelines can become confusing fast, and you have enough to worry about when you’re starting a new business. Here’s a breakdown of common expenses and categories for startups and what costs qualify for deductions.

Fixed versus variable startup costs

First, it’s helpful to understand the most common costs startup owners have to deal with, which can be broken down into fixed and variable expenses. Fixed startup costs are pretty much just like they sound—they’re static costs that don’t change much month to month. These include:

  • Rent
  • Utilities
  • Loan/debt payments
  • Insurance
  • Taxes
  • Software and technology
  • Payroll
  • Office/operational costs

On the other hand, variable costs may be rare or fluctuate regularly. Variable costs may be:

  • Design services for marketing materials, logo, and website
  • Down payments on a mortgage
  • Security deposits
  • Costs of starting the business, like licenses and incorporation fees
  • Office/location improvement expenses

Startup expenses will vary based on industry and other factors. For instance, retailers will have to worry about buying an effective point-of-sale system, whereas restaurant owners must pay for kitchen equipment, supplies, and food items.

What startup costs qualify for tax deductions?

Startup costs are any expenses incurred for the following:

  • Starting an active trade or business, or
  • Investigating the process of creating or acquiring an active trade or business

These expenses are experienced before a business starts accepting customers. The IRS specifies that for a startup cost to qualify for a deduction, it has to meet these two requirements:

  • The cost is one a business could write off if they paid or incurred it to operate in an active trade or business that already exists in the same field the new startup is trying to be part of.
  • The cost is one a business pays or incurs before the beginning date of their active trade or business.

Qualifying startup owners who pay for these expenses can deduct:

  • Analyses or surveys of the market, products, labor supply, transportation facilities, or similar activities
  • Ads related to starting the business
  • Compensation to employees and instructors who are being trained/training employees
  • Travel costs associated with getting customers, distributors, or suppliers
  • Professional fees or salaries for executives, consultants, or similar professionals

What startup costs don’t qualify?

Fortunately, there’s a lot you can deduct as a startup. But not everything can be written off. Nonqualifying costs include:

  • Taxes
  • Research and experimental expenses (capital expenses that are “reasonable” expenses incurred related to business or trade activities that give you information that would “eliminate uncertainty about the development or improvement of a product”)
  • Deductible interest

Recoverable startup costs for purchasing an active trade or business are only those associated with the preliminary investigation into the company—basically, how you decided whether or not you should buy the entity.

How to deduct startup costs

Business owners can deduct up to $5,000 in startup costs as long as the total is $50,000 or less. If you find that your expenses exceed this limit but are still $55,000 and under, you can still deduct some—the allowable deduction will just be lower. But startup costs won’t qualify for a deduction at all for the first year if expenses were more than $55,000. You’ll have to amortize all of them in the following years (more on that just below).

After the deduction, any costs remaining should be amortized in equal parts over the next 15 years. Amortization is how you can recover certain capital costs, similar to how depreciation works. You’ll use IRS Form 4562 to take the amortization write-off each year, which must be included with the business’s tax return.

What if you have questions?

Starting up a business means being inundated with new considerations, financial obligations, and priorities. Fortunately, the IRS allows owners to write off some steep costs in the first year and others over 15 years with amortization. 

If you’re unsure which startup costs qualify and how to go about reporting everything correctly, it’s best to work with a tax professional. The team at Provident CPA and Business Advisors is here to advise you on the best way forward. We ensure you’re getting every single deduction and credit your business is eligible for.

Learn how we can help by contacting Provident today.

Managing Risk vs. Reward in Business: A Careful Balancing Act

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New business owners need to have the perfect balance between taking big risks that will pay off and being strategically cautious.

Key takeaways:

  • Understand the major risk categories for businesses:
    • Strategic
    • Reputational
    • Financial
    • Growth
    • Market
  • Come to terms with some inevitable failures.
  • Don’t underestimate the power of research!

Taking on any business venture involves some kind of risk. Entrepreneurs who think they can become insanely successful while only playing it safe still have a lot to learn. Yet big payoffs aren’t guaranteed when taking a significant risk—quite the opposite can and often does happen.

The most significant business risks include financial issues, competitive threats, and market and reputational risks. And any investor wants to see that a business owner has thought through these threats and has plans to avoid or deal with them.

How do you stay cautious and smart while still taking on exciting opportunities along the way? Here is a starter guide to managing business risk vs. reward.

1. Understand the categories of risk

First, all risks are not created equal. There are different levels and categories of business risk that you must identify and think through before balancing them vs. potential rewards. Here are some of the basics:

Strategic risks

No one strategy perfectly fits with every type of company or industry. Part of the challenge is ensuring that your business plan is and stays relevant and up to date. What’s more, markets can change fast, putting you in a bind unless you’re willing to pivot strategy.

Reputational risks

For new and old businesses alike, reputation matters to keep customers and score the new ones that enable growth. One small move can change perceptions for the better or worse. Any disappointment to a customer or prospect can impact a company’s reputation, leading to dramatic effects on the bottom line.

Financial risks

There are many financial risks involved in a new business. You have to weigh the pros and cons of having debt and applying for loans, putting work into finding investors, managing monthly cash flow, and investing money in the right business functions at the right time (like marketing versus hiring and recruitment). Often, financial risks are the most critical ones to any new or thinly capitalized venture.

Growth risks

One element related to financial risks is the need for growth. Owners have to make numerous decisions that could be hard now but will pay off big time in the future. You must carefully decide your approach—are you more concerned with short-term booms or playing it safe for a more certain long-term outcome? For example, if a business scales too fast, it may not deliver on promises to customers. At the same time, you also don’t want to risk competitors getting ahead of you while keeping your head down.

Market risks

Markets fluctuate, sometimes in an instant. These shifts can be caused by changing consumer priorities and needs, economic upturns or downturns, new competitors, or “black swan events,” such as the recent pandemic. One product or service that’s hot this year may be old news in the next. A new competitor could come onto the scene with a lower price or a new technology.

Understanding the common and impactful risks and which ones may influence the bottom line is a crucial component of both starting and running a business. You can more successfully manage any threats by evaluating their likelihood and potential impact—and planning to address them proactively.

2. Come to terms with failure

Just because there is risk involved in a new venture doesn’t mean it’s not worthwhile. Even with the best plan and intentions possible, every business owner faces some level of peril. It’s impossible to avoid.

Because there’s no way to get around risk, it’s essential to embrace the fact that failure is likely going to happen—to some extent. The goal is simply to maintain those failures as temporary roadblocks, not catastrophes.

Nevertheless, many entrepreneurs plan as if they’ll never fail and are unpleasantly surprised when something goes wrong. It’s important to expect and prepare for mistakes—they’re going to happen. When you do run into a challenge, this point of view enables you to keep pushing through it. It also helps you recognize when something needs to change about your approach, which helps ensure a business (and its leaders) continues to grow.

3. Don’t underestimate the power of research!

The most effective way to avoid the biggest business risks is to have a plan. Push beyond the hypothetical and assess what would happen if a new strong competitor shows up or you experience a cash flow issue. How would you handle it? What steps would you take right away? What resources do you have to turn to in your network?

To create a plan that helps minimize or combat risks, plenty of research—and then some—is required. Pay close attention to who is leading your given market. What’s working for them and what isn’t? What are their biggest challenges at the moment? 

Also, make sure to track consumer buying trends and customer preferences. For example, if you run a business where you meet with clients one-on-one, is it important to offer a virtual meeting option to stay competitive? It’s also valuable to survey target audiences. Ask them what’s most important to them right now and what they want to see from the businesses they support—including yours. 

Every time a new opportunity presents itself, research it from every perspective. For example, if you’re considering making a new big purchase or investment, make sure to evaluate every option and think through the financial commitment. Sometimes, there’s a cheaper or better alternate route that will help minimize financial risk.

Finally, make sure to monitor and analyze the business’s track record. Implement processes for assessing vital operational and financial KPIs to see the rewards or setbacks you’re experiencing. This helps evaluate which risks to take on in the future and which to avoid based on experience.

Managed smartly, business risk is inevitable but valuable. After all, the reward side of the equation rarely exists without it.

Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.

Should I Copyright My Business Name and Website?

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Original works are automatically protected by copyright, but when would you need to copyright or trademark something explicitly? Here are some common FAQs!

Key takeaways:

  • FAQs about copyrights:
    • Can you copyright a business name and mottos? Brand names and logos would fall under the trademark umbrella.
    • Can you copyright your website? Generally, you can’t explicitly copyright a whole website, but you can register individual works that appear within it.
    • Can you place a copyright notice on an original website? Yes.
    • When should you copyright something? Original works are automatically protected, but registering can provide additional intellectual property defenses.
    • What’s the process for registering? You’ll need to submit an application, pay a fee, and provide a deposit copy of the work.

As a small business owner, you want to do everything possible to reduce liabilities and risks—but the world of intellectual property can quickly become confusing. Many entrepreneurs may wonder if they should copyright their content or business name to protect it from being used by others.

This guide briefly walks through common questions about copyrights and trademarks:

Can I copyright my business name and mottos?

First, it’s essential to understand the difference between a copyright and a trademark. A copyright protects original artistic works that have been fixed in a tangible medium, including a work of art, photograph, book, article, or song. A trademark, on the other hand, protects unique identifiers like slogans and brand names. 

So, if you’re looking for protection for your business name, slogan, and even logo, you’ll need to look toward a trademark. You must use the item in a commercial setting to qualify for this protection.

For both copyrights and trademarks, it’s important to understand that you will have protection for your qualifying content automatically, even if you don’t officially register your work or brand. However, registering for copyright or trademark protection can give you more legal defenses should you need them. 

Can I copyright my website?

Business owners typically don’t have to copyright their entire website. In fact, the United States Copyright Office states: “Although a website may contain text, artwork, photographs, music, videos, or other copyrightable content, the website itself is not typically considered a copyrightable work.” 

However, sometimes the whole website or a page can be registered if it could be considered a compilation or collective work according to copyright guidelines.

You can copyright original content that appears on your website, including each image, video, and piece of text. You would register an original blog post, white paper, or article you produced, for example, as a literary work, and an illustration you created or photograph you took as visual artwork.

Other examples of copyrightable content include recordings, music, videos, images, and other audiovisual works.

However, uncopyrightable material associated with a website would be:

  • Ideas and plans for future websites
  • Functional design elements
  • URLs and domain names
  • Website layouts or formats
  • Unoriginal material (names, icons, familiar symbols)
  • Work that is in the public domain

Can I place a copyright notice on my original website?

You may have noticed that many websites include a copyright notice with the year at the bottom of every page. You can do this as soon as your website is live to remind visitors that they cannot reproduce the original website content elsewhere, and it costs nothing. The copyright symbol can be placed on any work you have created, regardless of whether it was registered with the Copyright Office.

Include the copyright symbol (©) or “Copyright,” followed by the current year and your company name.

When should I copyright something?

The next question you’re probably asking is, should you copyright? 

Remember, anything original you create is automatically protected by copyright laws, even if you don’t register it officially. However, filing for copyright registration simply provides further protection, including increasing eligibility for statutory damages and providing concrete proof of ownership should you need it. 

This is what the Copyright Office says about whether or not to register:

“Registration is recommended for a number of reasons. Many choose to register their works because they wish to have the facts of their copyright on the public record and have a certificate of registration. Registered works may be eligible for statutory damages and attorney’s fees in successful litigation. Finally, if registration occurs within five years of publication, it is considered prima facie evidence in a court of law.”

What’s the process for registering for copyright?

If you decide to register original works for copyright protection, there are three key elements to gather and submit:

  1. A completed application form
  2. A nonrefundable filing fee
  3. A deposit, which is a copy (or copies) of the work you’re registering

The application form will ask the author’s identity, the type of work registered for copyright, and the copyright owner. You’ll need to submit the above three items for each item you want to register with the US Copyright Office.

In the end, the decision to copyright material is an individual one, and some protections are automatic. But doing so may have some advantages should legal action become necessary. Be sure to contact a qualified business or IP attorney to review the options or assist with possible infringement.

Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.