It’s that time of year, when summer is over and fall begins with kids back in school and vacations ending. For some, fall also means a dreaded tax deadline is coming up: Oct. 15, the deadline for those who took the six-month extension for filing their personal income tax returns.
Many tax advisers and accountants get a flood of panicked procrastinators before the April 15 deadline, but a smaller wave of filers builds up in the fall, too.
“People wake up one morning and realize, ‘I have to file my tax return soon,’” said Mark Gallegos, a partner at Porte Brown and a certified public accountant in Elgin. “They think, ‘Summer is over — I got to buckle down.’”
Self-employed people still can do things in the weeks before next month’s deadline. And while it’s best to seek advice from a tax professional, here are some tips for self-employed people, who are not necessarily registered businesses.
Growing number of self-employed workers
The definition of a self-employed worker has expanded as side hustles, freelancing and consulting have grown in the age of remote and gig work.
“There are a lot of side hustlers. Maybe it’s someone who monetized a hobby. There are a lot more of them now,” said Helena Swyter, a CPA and co-owner of financial advisory SweeterCPA in Chicago.
Since the COVID-19 pandemic, Gallegos has also noticed more people starting their own business. Perhaps they were a construction contractor or worked in corporate sales for years, Gallegos said. “They thought, ‘I have great contacts. I’m going out on my own.'”
You also don’t have to own a registered business to be considered self-employed. Anyone who receives a 1099 form for earned income could be considered self-employed. That can include Uber and Lyft rideshare drivers, people who sell crafts on Etsy or do TaskRabbit jobs, life coaches, dog walkers and cat sitters, as well as freelance writers.
If you are a full- or part-time W-2 employee but do additional work on the side, you are also self-employed. For example, Moira Corcoran, a CPA and owner of Corcoran Business Advisors in Libertyville, is also a contractor for the website JustAnswer, where users can post questions and receive answer from experts such as accountants, doctors and lawyers. Experts like Corcoran are paid for each question answered.
Another indicator of self-employment is if you fill out a Schedule C with your Form 1040. Schedule C forms are “to report income or loss from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if: Your primary purpose for engaging in the activity is for income or profit,” according to the IRS. A Schedule C is not for C or S corporations.
In tax year 2022, about 24.5 million Schedule Cs were filed compared to roughly 21.4 million in the previous tax year, according to the IRS.
Contributing to an IRA
The Simplified Employee Pension IRA lets business owners contribute toward their employees’ retirement — as well as their own retirement savings, according to the IRS. So it fits the bill for a sole proprietor.
SEP IRAs follow the same rules as traditional IRAs. They can be easily and quickly opened through a bank or investment firm like Vanguard or Fidelity Investments. You can set up a SEP plan as late as the due date of your income tax return for that year and that includes any filing extensions.
For the 2023 tax year, self-employed people can contribute up to $66,000 for 2023 or up to 25% of their compensation, whichever is less, to a SEP IRA. The amount is tax deductible.
The IRS has user-friendly guides on its website so people can calculate their eligible contribution, Swyter said.
Contributing to a SEP IRA has multiple advantages, such as lowering your taxable income, getting a tax deduction and allowing you to save money for retirement. The money can be invested and grow tax-free like other retirement accounts such as a 401(k).
Even if you’re employed as a W-2 worker, you can still open a SEP IRA if you earn self-employment income.
Gallegos said the SEP IRA “doesn’t require as much thinking to set up,” but there are other retirement plans. For example, there is the Solo 401(k) that covers a business with no employees, or the owner and their spouse, and there’s the SIMPLE IRA plan, available to any small business with about 100 or fewer employees.
There are different rules about various retirement plans so it’s best to consult a certified financial adviser or accountant.
Deducting your home office
Another benefit for self-employed workers to look into is deducting expenses for a home office, including a portion of rent.
However, only a home workspace used solely for self-employment applies — a desk for working from home for a company you don’t own doesn’t count. The home office must also be “regularly and exclusively used for business,” Swyter said. For example, working from your laptop on your sofa doesn’t count as a workspace.
Corcoran said there are two ways to take advantage of the home office deduction.
A filer can multiply $5 per square foot for business use of the home. The maximum size for this option is 300 square feet with a maximum deduction of $1,500.
The other option is calculating deductions for a home office based on the percentage of the home devoted to business use. People who devote a room or part of a room for conducting business will need to figure out the percentage used for business activities to deduct indirect expenses such as utilities.
Corcoran said one pitfall to avoid is “double dipping” if you own your home and already itemize mortgage interest, property taxes and other expenses.
“It’s tricky when you own your house,” Corcoran said. “You have to determine which is the better option.”