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Smart Money Podcast: Taxes for the Self-Employed – Avoid Common Tax Mistakes and Navigate Freelancer Finances


Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Master self-employment taxes and avoid common tax mistakes with expert strategies for managing your finances year-round.

How do self-employed taxes work? What are some common tax mistakes self-employed people make? And can you really write off payments on a luxury vehicle if you use it for work purposes? Hosts Sean Pyles and Elizabeth Ayoola discuss the intricacies of self-employment taxes and strategies for financial success and IRS compliance to help you understand how to navigate tax season as an independent worker.

CPA and financial strategist Krystal Todd joins them to delve further into the details of self-employment taxes, with tips and tricks on budgeting for personal and professional life, the importance of making quarterly tax payments, and whether to DIY taxes or hire a professional. They also discuss strategies like depreciating assets, the benefits of hiring family members, and navigating the complexities of tax deductions.

Plus: financial strategies for handling unexpected income and managing self-employment taxes, the importance of setting aside funds for unexpected expenses, and the advantages of timing revenue recognition and prepaying expenses for tax benefits.

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Episode transcript

This transcript was generated from podcast audio by an AI tool.

As Ben Franklin himself said, in this world, nothing is certain except death and taxes. Taxes, as we all know, can be wildly confusing, and that goes double when an employer isn’t there to help.

We need quarterly payments just of you estimating how much you think you’ll be paying in taxes, and then at the end of the year when you actually file your taxes, they’ll make adjustments based on whatever credits and deductions you’re eligible for, what you’ve already paid, and then you’ll see what you net.

Welcome to NerdWallet’s Smart Money Podcast. I’m Sean Pyles.

And I’m Elizabeth Ayoola.

Today we bring you episode two of our nerdy deep dive into self-employment. In our last episode, we talked about the importance of budgeting when you’re working for yourself. Obviously here at Smart Money we think it’s a good idea for everyone to budget, but especially if you’re self-employed, you’re going to need to budget for both your personal life and your professional life.

So in this episode, we’re going to answer the most important tax questions self-employed people have, like how do self-employed taxes even work? Is it better to DIY your taxes or hire a pro? And can you really write off payments on a luxury vehicle if you use it for work purposes? Welcome to tax season.

Womp womp. My favorite part of tax season is when it’s over. Thankfully, I’m getting better at taxes every year and I’m also learning to outsource. Shout out to my tax person. Anyways, yes, it’s February and it’s tax time for all of us. And if you’re a gig worker, freelancer, contractor, or other solo entrepreneur, you need to make sure that you’re doing all the heavy lifting an employer would usually do for you. And you have to do that to avoid mistakes and IRS penalties. Hopefully those who aren’t new to self-employment have withheld enough quarterly taxes throughout the year so they’re not hit with an IRS penalty. New listeners who are about to dip their toes into self-employment are about to learn about how self-employed taxes work.

Yeah, that is no bueno. I know people who, when they started freelancing, had no idea that they were supposed to be paying taxes all year long quarterly instead of saving up for a big payment at the end of the year. The IRS does not look kindly on that, even if it ends up that you overpaid. And by people here, I am absolutely referring to myself because I once found myself in a world of tax hurt back when I was a contractor, and that is a lesson I shall not soon forget.

It’s good to know I’m not alone, Sean, because I’ve been there too and it wasn’t fine.

It hurts. It’s a heartbreak.

All right, well, we want to hear what you think too, listeners. To share your ideas and questions around self-employment with us, leave us a voicemail or text the Nerd Hotline at 901-730-6373. That’s 901-730-NERD. Or email a voice memo to [email protected].

So Elizabeth, who are we hearing from today?

Today we’re going to be chatting with Krystal Todd. She happens to be a certified public accountant, a financial strategist, a money mentor and an entrepreneur. Her resume puts her in a good position to give us the juicy details we need on self-employed taxes.

That’s coming up in a moment. Stay with us.

Hi Krystal. Thank you for coming onto the podcast.

Yes, thank you so much for having me. Really excited to talk taxes. This is my bread and butter. I love talking about anything money, really.

No, I’m with you. I’m not going to lie, I do not love taxes, but I do love to understand taxes because I don’t want to pay the IRS more than I have to pay them.

Oh, no. That’s why I’m here.

Another tax year is upon us, and I think this information is going to be super helpful. So with that said, I’m going to jump straight into the first question I have for you, which is how do self-employed taxes work? And I know this is a big question, but I know I learned the hard way about self-employed taxes and I learned that they’re higher than what you pay when you’re working a traditional job with an employer.

So I want you to tell us why self-employed taxes are higher, especially when the government seems to provide so many incentives for small business owners.

So it’s a double whammy because not only is it higher because we’re paying both sides of the employer tax, but we also have to pay it ourselves. So if you’re coming from a W-2 world into self-employment world, normally in W-2 world, it’s all handled for you. The biggest difference is that you’re having to have full control over paying your taxes, paying quarterly, whereas a W-2, you’re paying every paycheck. It doesn’t feel like that, but that’s what’s going on. And then the self-employment tax. So typically with your W-2 employee, you’ll pay half that piece and then your employer pays half of it, but because you’re self-employed, you are the employee and the employer, so you’re paying 15% in taxes.

That 15%, I remember the first time I saw it and whipped out my calculator and I was like, “Wait, what? This was a chunk of money.” So I was a little unpleasantly shocked by that number.

Yeah, there is a way to get around it.

If you’re just starting out, maybe it wouldn’t be most beneficial. It does depend, and of course you have to always throw a disclaimer out there. Everyone’s situation is different. I’m a CPA, but not your personal CPA, so take everything I’m saying as little seeds of wisdom to go research.

When you’re first starting out, maybe you don’t have your EIN, which is just basically your social security for your business, employee identification number. So it’s like your social security number but for your business, because businesses are their own entity. But when you’re first starting out, maybe you’re not doing all of that. So if you’re in the sole proprietor category, which means you’re just working for yourself, you hired yourself, maybe the next level up is LLC, limited liability company. So you’ve gone ahead and filed for that LLC so you have some protection, but you’re still going to be paying a lot of taxes.

It’s not until you get into the S Corp. And of course there’s a couple of qualifications there, but once you get into S Corp, you can actually pay yourself as a W-2 employee in your business. And then that’s how you circumvent that self-employed tax because even though it’s your business, you’re an employee of the business so it looks like a W-2. And the benefit of that too is especially if you’re self-employed, and I know some people have felt me on this, if you’re trying to get a loan for a car, once they see you’re self-employed, guns are blazing, right? They’re ready to ask you all types of questions. You have to provide so much information. As an S Corp, if you’re paying yourself, you’re going to receive a W-2 from your business so they don’t have to know it’s your business. They just see W-2 and no questions asked. There are some benefits to having an S Corp for sure.

By the way, for everyone listening, we’re going to go a lot deeper into the different business structures in a subsequent episode, so don’t worry. We’re going to touch on that some more.

So now back to taxes. I know estimated taxes are something that I now do. Didn’t do before, but I remember when I was first researching self-employment taxes, that came up a lot. But I thought, “Hey, I can just pay it in one lump sum,” and I didn’t really dig deeper to read all of the fine details. Can you explain to us what estimated taxes are and how exactly it worked?

Of course. So as I mentioned previously, as a W-2 employee, you’re paying taxes every single pay period. So you don’t necessarily have to worry about that, but as a self-employed individual, you’re not paying any taxes. So what the government has said is, “You’re not off the hook.” You’re not going to pay just one time at the end of the year. We need quarterly payments just of you estimating how much you think you’ll be paying in taxes, and then at the end of the year when you actually file your taxes, they’ll make adjustments based on whatever credits and deductions you’re eligible for, what you’ve already paid, and then you’ll see what you net.

So it’s crucial to pay quarterly taxes, and you can use things out there that help you track your expenses and your income and can even help you calculate that too, so you don’t have to necessarily do it all on your own.

Absolutely. So tell us, when are the self-employed taxes due and what happens if you don’t pay them?

Yes, they’re quarterly. If you don’t pay them quarterly or they realize that you haven’t paid enough, you will get fined. You don’t have to end up in jail if it was a legitimate accident, so you’ll be fine, but you will get penalized and it can be a little costly. So definitely make sure that you are just getting that done ahead of time. It’s a fresh new year, so new opportunities to make sure we’re staying on target.

Yes. And for those who maybe are listening and unfortunately missed out on paying quarterly taxes and maybe in April are going to end up being hit with a bill, are there any options in terms of how they can pay it if they don’t have that lump sum cash?

It depends on your situation. Sometimes the IRS will say, “No, you need to make this payment,” and sometimes they’ll work with you depending on the amount. So it does depend on your circumstances.

What was this I heard about that you can sometimes do a payment plan with the IRS. So is this true?

Yeah, no, it’s true. It’s true. I think it just depends on, like I said, your circumstances. Maybe there’s situations where if you had issues before, they’re a little bit more strict on you, but you can make payments.

So now we want to get into the mistakes so other people can learn from those mistakes. So what are some common mistakes that you see clients make when it comes to paying their self-employed taxes? So for me, for example, I just wasn’t good at bookkeeping initially. I had my money in too many different accounts, so it was overwhelming when tax season came around to see what my deductions were and just basically my income. So as a CPA, tell us maybe two or three common mistakes you see people make.

The common mistake by far is not making sure that they’re taking all the deductions and credits that they’re actually eligible for. So ultimately, a lot of people will think about taxes as a January through April situation, but it’s a year-round thing. Tax planning is almost more important than actually tax preparation. You want to think about the whole year and ways you can save money, different things you could probably invest in to bring your taxes down. So missing out on tax planning and then trying to just rush everything towards the end of the year is by far the biggest mistake. I’ll see people scrambling for receipts, looking back, and a lot of times if you’re just starting out, typically maybe they won’t have a separate business account as well.

Depreciation is the biggest one that I think people miss out on, not only for things like Airbnb in your home, but also your car. If you’re doing Uber or Lyft, you can get credit for the wear and tear on your car. If you have a computer or any devices that you have, those things are also depreciable or you can actually fully deduct them in certain cases. I definitely think that you should be empowered and doing it yourself, but if your taxes are getting complicated, you’d want to make sure that you’re leaning on a tax professional who will catch those expenses because a lot of people are paying too much.

Thanks for sharing all of those incredible ways that people can reduce their taxes. Can you tell me about some other deductions or ways that people can reduce their self-employed taxes?

Yeah, so a really neat one is making sure you hire your family in any capacity that you can. Now, of course, there’s some caveats here. You have to make sure you’re paying them a reasonable wage. So if they’re just an administrator, you can’t pay them multiple six figures. It has to be reasonable, but to the extent that it’s reasonable, you can actually hire them on. And I especially love this with kids.

So as an example of my own life, I hire my daughter and she’ll help me with my videos, she’ll help me with setup. She helps me with product development, and she’s been featured in a few of my videos online. So I will pay her. She’s a 1099 worker, so it’s not a W-2, so it’s simple. I just have to give her a check, and what I love about that is that I get to reduce my taxes, and this is more like W-2, but either way, we all get a standard deduction.

If I pay my child up to the standard deduction amount, which was just a little over $13,000 for 2023. If I pay her $13,000, I get to reduce my taxable income by that same $13,000. She pays no taxes on it because of the standard deduction, which basically is the IRS giving you some credits for having a kid or just whatever else is happening in life. They say, “Here’s just one flat rate. You just take that.” So she doesn’t pay taxes on that, and then I can put it into a custodial IRA for her and it’ll grow tax-free because it’s Roth. You’re saving money, they’re not paying any taxes, I mean, that’s a really good tax loophole there.

For sure, for sure. And speaking of which, since we’re on the topic of deductions, I know sometimes people go a little over the top with these deductions, forgetting that the IRS does audit people. I know recently I’ve seen something floating around on social media about being able to buy a Mercedes Benz, also known as G-Wagon, and write it off using your taxes. And the rules for this are really complicated, so make sure to work with the CPA if you’re thinking about doing it. So is this true? And if it is, what is the catch?

There are some caveats. It must be used in business. You can’t just buy a G-Wagon, you never drive in it. If you’re a realtor, for example, that might make sense. You have an image. If you’re a realtor, you’re selling million-dollar homes, you want to look the part. That might make sense. But if you’re a content creator working at home, you never go in the car to do anything, you cannot do that. In the eyes of the IRS that is illegal, so you have to make sure that it’s being used for business use. It doesn’t have to be exclusively, but if it is half business, half personal, you’ll have to adjust your taxes to account for that.

So sorry to get into the nitty-gritty, but when you say business use, someone might say, “Oh, I have a meeting, I don’t know, once a month, and I’m driving it to my meeting.” A content creator. Does the IRS get into the details of how frequently you’re using the car?

Yes, and the location. So if you’re driving from your home to a meeting, that doesn’t count. It’s only if you’re going from, let’s say, your primary job to your second job. Then that could actually be considered a deductible expense. So yeah, they’re very particular about what you’re using it for, where you’re driving from, and if you get audited, you better be prepared.

So can you tell us, on that note, some major red flags or even myths that you hear of when it comes to tax deductions?

Yes. I think that people think they could just deduct anything because it’s eligible. The government makes you go through hoops, especially after the Tax Cuts and Jobs Act where the standard deduction was doubled. They’re really trying hard to make you just take the standard deduction and just take that and go.

If you’re saying, “No, I’ve had more than $13,000 worth of expenses,” you might have. That doesn’t mean they’re all going to be eligible. So for example, for health costs that you’ve spent, maybe you spent $10,000 in health expenses for this year, but the government does not give you dollar for dollar, and if you take that, it has to be itemized. So you might do all this work trying to itemize your deductions and you were better off taking the standard deduction because they make you go through a lot of different hoops. There’s percentages, there’s phase-outs if you’re making a certain amount of money. So it’s super, super nuanced, and just circling back to what we talked about earlier as far as DIY goes, if you’re in that situation, unless you’re going to really put the effort into research, you probably are better off just getting someone who already has done this before and they’re comfortable with it because of all those different nuanced requirements that they have.

So in the spirit of… Well, I don’t want to say in the spirit of getting audited because I don’t think anyone wants to get audited, but just in case, give us some bookkeeping tips. I’m still refining my bookkeeping because it’s just not my strong area, but what are some bookkeeping tips so that if the IRS comes knocking, people are ready?

I strongly suggest getting software. If you have a software, you’re able to attach receipts directly to it. They’ll organize it for you. If you’re not someone who’s too familiar with income statements and cash flows and all of that, they prepare those documents for you. That by far has dramatically changed my business. And also having separate accounts. You can’t even imagine how many people will dig through their personal account looking for business expenses. Even if you’re just starting out, from the decision you’ve made to take this business seriously, please get your EIN so you can open up your business bank account, and that way everything is just flowing through one account. Lean on these different tools that will organize it for you and just be sure to keep receipts.

I would say you should be at least monthly. All these billion-dollar corporations, I mean, they’re doing things very frequently, but every single month we are balancing the books, we are going over our expenses and then we’re tax planning. So many people wait until the end of the year and then it just becomes a hassle. So to the extent that you can, get it done monthly. That is the best advice I have so you’re not stressing yourself out during these times.

We’re in a very tech-savvy age, so how are digital receipts? So every time maybe you make a purchase or whatever, just keeping a digital file of your stuff.

Yes, absolutely. And let’s say maybe you’re not ready for the software. That’s what I was doing when I first started out and I wasn’t too sure. Just a simple folder in your computer would work. Document everything in the moment as it happens, that way nothing is slipping through the cracks and you should be in good shape.

So the last question I have, because in this series we’re trying to cover people who also have how they can manage your finances when they have inconsistent income. So for someone who has inconsistent income throughout the year, maybe they don’t make as much during the beginning of the year, but let’s say halfway through the year they land a huge contract.

How do they budget then for self-employed taxes or estimated taxes, rather? Because I know that’s based on how much you think you’re going to make, but you don’t always know. So maybe you’ve been underpaying for the first half of the year and then the end of the year comes. How do you manage that?

I always say be as conservative as possible. It’s kind of like a dual opinion I have here because on one end, you don’t want to give the government an interest-free loan. That’s essentially what you’re doing when you get a tax refund. But on the other end, you also don’t want to deal with owing money, maybe being penalized and then having to pay that next year. So to the extent that you can, I would say be as conservative as possible when it comes to paying your taxes. Again, there’s different software that’ll help you establish what you should be paying. When you get that windfall, you weren’t really expecting it, right? So I like to live off of my most conservative amount of money.

So let’s say maybe it’s $10,000 a month. If I made $20,000 a month, I will ignore that $10,000 and put it to the side just because you’ll have that extra cushion to keep you protected in the event that you have a windfall you don’t expect. That happened to me last year, actually. I had quite the windfall and I wasn’t expecting it, but I had practiced what I preach and I had some money to the side, so it was okay. So whenever you get those large sums of money, pretend like you didn’t. Just live conservatively and then once a year is done, once you calculate your taxes and you pay it, then you can enjoy the rest. So it’s delayed gratification.

Oh, I like that as a way of looking at it. And one day when I was complaining about my taxes, I remember someone saying, “The brighter side of that is that you made more money.” So we welcome a windfall, we just have to prepare for those windfalls.

This is a little bit more technical, but something that I love because this again happened to me last year. Let’s say seasonality is something that your company is affected by. Maybe you get a big windfall of purchases or something at the end of the year. In certain circumstances, it might be best to ask them to pay you next year, right?

If you are a cash-basis type of accounting, you won’t get taxed unless you actually receive the money. So maybe you did make that revenue, but if you can have it pushed off to the next year because you didn’t expect that windfall and you don’t want to necessarily deal with the influx of the money you have to pay for those taxes, maybe you can have your customers pay you January 1st or January 2nd. That way you’re not going to be affected by that surprise, and that’s 100% legal. You can delay that or you can bring forward some expenses too.

This only works if, again, you are a cash basis, but if you want to pay something off for the whole year, you’ll be able to deduct that even if the whole year hasn’t actually happened yet. So there’s different ways towards the end of the year to try to get some last minute things in just to further insulate yourself.

Love that. Those are some really, really good tips and a reminder of why it’s good to talk to CPAs. Do you have any final words of wisdom or anything that people might not be thinking about relating to self-employed taxes that you want to share?

Yes. You are the driver. A lot of times people will shy away from it because it is intimidating, but in the age of information that we’re in right now, there is an influx of free information online. This is an example of one of them. Don’t be paralyzed by fear. Really lean into it because the difference between small business, and I really don’t use that word lightly because no matter if you’re small or big, you have to do the same exact stuff. So why even identify with your revenue or the size of your company? But a business is a business, and these larger companies become larger because they are hands-on and they’re very proactive with how they’re managing their money.

So I suggest that you do so too and do not be afraid of delegation. I, in other areas of life, have not delegated, and that is what comes back to haunt you. So you don’t have to do it all on your own. There are free resources, there are paid resources. Definitely make sure you’re just taking advantage of what you can take advantage of and you’re planning so that you can not be surprised with tax bills at the end of the year.

Yes, absolutely. Echoing what Krystal said, you do not have to do it alone, and that is something that has made taxes a lot less daunting for me. Thank you, thank you, thank you, Krystal. This was so informative. I have learned so many new things that I’m going to apply when it comes time to do my self-employed taxes, so thank you. Thank you for coming.

You’re so welcome. Thank you for having me, and good luck everybody in this tax season.

Elizabeth, I never thought I’d say this, but that was actually a super interesting conversation about taxes. I am someone who was a planner in all aspects of my life, and like Krystal said, planning ahead with your taxes is so key whether you’re finding deductions, hiring your family, or making quarterly tax payments, but also there is a big difference between planning and scheming. I’m so glad that you guys talked about that viral G-Wagon tax hack because I have seen that so many times on TikTok. I have been really worried about people getting themselves into a world of trouble with their taxes.

I’m telling you, on the journey of self-employment, I have realized that there are some things that are not too good to be true, but other things are too good to be true, and I think that’s one of them.

So while taxes can be a snooze fest, I think learning about ways to save and avoid penalties will always grab my attention. I love all the tax saving strategies that Krystal shared, and also the deduction red flags to look out for. I mean, for me, this episode was also a reminder about how important it is to talk to a tax professional who has extensive knowledge, and that’s even if you’re a DIY type person.

I feel more confident about filing my self-employed taxes now because of all the information we just got. But Sean, before we go, I do want to mention one development that we didn’t address with Krystal.

Well, starting this year, there’s a new law called the Corporate Transparency Act. And what that says is that anyone with an official business designation, especially a one or two-person LLC, is going to want to be aware of.

This is an effort to stem money laundering and tax evasion in the small business category, and basically you have to file some extra paperwork with the Treasury Department called a Beneficial Ownership Information Report. If you don’t do that, you could be fined $500 and possibly get up to two years jail time, and don’t nobody want two years jail time.

Nobody. So definitely talk to your tax accountant and or your business attorney about that.

Yourself included, Elizabeth. I do not want you to go to jail, so please get this done.

Well, thanks for that information. Elizabeth, please tell us what’s coming up in episode three of this series.

Sean, we are all about getting to retirement here on Smart Money, but saving for it can often be an extra challenge when you are self-employed. We’re going to walk listeners through their options and how to make sure you’re planning for the future, even while you’re going into business for yourself.

If I can get to 10%, a double-digit percentage of my pay, of my gross pay, my pre-tax pay, I’m in the right ballpark. If you are self-employed, then the onus is on you, of course, to put in everything into your own personal retirement plan.

For now, that’s all we have for this episode. Do you have a money question of your own? If you do, turn to the Nerds and call or text us your questions at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. You can also visit nerdwallet.com/podcast for more information on this particular episode. And remember to follow, rate, and review us wherever you’re getting this podcast.

This episode was produced by Tess Vigeland. I helped with editing, Courtney Neidel helped with fact checking, Sara Brink mixed our audio, and a big thank you to NerdWallet’s editors for all their help.

And here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes, and it may not apply to your specific circumstances.

And with that said, until next time, turn to the Nerds.



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