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Figuring out how to file your self-employment taxes can feel intimidating and time-consuming, especially with the ever-changing tax laws that can confuse even an experienced filer. \nHowever, this process doesn't have to be a headache. As the 2023 deadline quickly approaches, preparing in advance can help you avoid costly penalties and fees. That way, you can enter tax season feeling confident and stress-free.\nKeep reading to learn how to prep, calculate, pay, and file your self-employment taxes in 2023. \nWhat is self-employment tax?\nOne of the first major shocks of working for yourself is learning that you’re now responsible for additional taxes. In short, the self-employment tax is something that all self-employed individuals must pay in addition to the income tax.  The Internal Revenue Service (IRS) uses this tax to fund the Social Security and Medicare programs. If it helps, you can think of it as investing in your own retirement since those programs largely support retirees. \nThe good news is that you don’t have to pay this tax until you earn more than $400 in self-employed net income. After that, you’ll have to put aside a percentage of your earnings to ensure you can afford to pay what you owe when the time comes. \nThis process differs slightly from filing taxes with a regular job because employers pay half their employees' Medicare and Social Security taxes while self-employed workers pay the entire thing. And unlike with a regular job, there’s no employer to take these taxes out automatically, so you have to be responsible. \nAlso, remember that the self-employment tax is not the same as income tax—which you’ll also have to pay.\nWhat is the self-employment tax rate in 2023?\nThe official self-employment tax rate for 2023 is 15.3%. To break that down, 12.4% goes toward Social Security, and 2.9% funds Medicare.\nThere’s also a cut-off for paying the Social Security portion based on your overall income from net earnings, wages, and tips. Keep in mind that the cutoff increased 8.2% to $160,200 for the 2023 tax season.\nOn the other hand, Medicare taxes never cut off. If you are a single filer who earns more than $200,000 from self-employment, you might even have to apply a 0.9% additional Medicare tax. For joint files, the income limit is $250,000.\nWho pays self-employment taxes?\nSelf-employment taxes are the responsibility of all self-employed individuals. These rules apply regardless of age or whether you are on Medicare or receive Social Security benefits. You'll likely have to pay if you earned more than $400 from a self-owned business. \nHere are some specific examples of who pays self-employment taxes:\nGig workers like rideshare and delivery drivers\n\nFreelancers and independent contractors\n\nAnyone earning passive income from:\nBeing a partner in a business\nBook/digital product sales\nMusic sales\nProduct sales\nOnline marketplaces (Etsy)\nSole proprietors or anyone \nneeding an LLC\n\nReal estate investors \nAnyone earning more than $108.28 a year from church employment\nNote that if you also have a full-time job, you’ll only apply the self-employment tax to your self-employment income. Also, in-home caregivers for disabled and elderly individuals \ndo not pay self-employment taxes\n.\n\nHow to file self-employment taxes step by step\nFiling your self-employment taxes can be a daunting task, but with the correct information and a few helpful tips, you can make the process much smoother. Below, we'll walk you through the steps of filing your self-employment taxes step by step. These tips and tricks will help you easily and confidently navigate the filing process.\nStep 1: Gather your documents and relevant info\nFor a stress-free filing experience, you’ll want to have all the necessary information and documents ready to go before you do anything else. \nFirst, you’ll have to provide identification in the form of either your Social Security number or your Individual Taxpayer Identification Number (ITIN). If you pay people to work for your business—even if they’re contractors—you will need an Employer Identification Number (EIN). Otherwise, you can use your social security number. \nThe next document you need is the 1099 form. If you don’t know, a 1099 form is for reporting income that doesn’t fit traditional W-2 reporting, such as freelance work, rentals, royalties, and independent contractor payments. \nYou can also use it to report non-employee compensation to contractors and other service providers of more than $600. If you did contract work for a company during the tax year, they should send you a 1099 form before tax time.\nTip:\n Companies will likely request that you fill out a W-9 form while establishing the service contract. The purpose of that document is to collect your tax-relevant information so that the company can accurately fill out your 1099 form.\nAdditionally, you should find all ledgers or bookkeeping tools you used to record income and expenses. You’ll want to keep your expenses organized throughout the year, so finding \nproof of income\n is super easy when tax season rolls around. \nStep 2: Total up your earnings\nOnce you’ve gathered all the necessary information, it’s time to calculate your earnings. The formula for this step is:\n[Net earnings = Gross self-employment income - Business expenses]\nTo avoid mistakes, you can make these calculations using \nSchedule C (form 1040)\n if you’re filing as a sole proprietor or \nSchedule E (form 1040)\n to report passive or supplemental income.\n\nStep 3: Total up any possible tax deductions\nAs a self-employed individual, the IRS allows you to deduct certain \nbusiness expenses\n from your taxes. This can help reduce your overall tax burden and save on the extra costs of self-employment. Here’s a quick overview the deductibles you could be eligible for:\nHome office:\n Expenses involved in running your business from home.\nEducation:\n Funds you spend to gain expertise towards your business.\n“Above-the-line” deduction:\n Half of your self-employment tax is deductible from your income tax.\nQualified business income (QBI):\n Up to 20% of your net profit. \nPhone and internet costs:\n Expenses you incurred from using your phone or internet for business purposes.\nMemberships:\n Expenses related to joining professional organizations in your industry.\nAdvertising/Marketing:\n Expenses involved in marketing your business.\nStartup costs:\n The costs of getting your business up and running.\nOffice supplies:\n Any funds you spend on necessary items for your office.\nCredit card and loan interest:\n Interest you gained on credit accounts from business purchases.\nBusiness travel and meals:\n Expenses involved in traveling for work.\nCar:\n Expenses related to using your personal vehicle for business.\nBusiness insurance premiums:\n Funds you pay towards insurance if you have employees.\nHealth insurance:\n Expenses related to securing health insurance.\n\nRetirement plan\n contributions:\n Expenses involved in securing a retirement plan.\nKeep in mind that each of these \nself-employed tax deductions\n has rules and requirements you need to follow.\nIt’s also possible to avoid the self-employment tax altogether if you file your LLC as an S Corp. You’ll only have to pay on your personal salary, as opposed to all your business profits. This solution may not work in all situations, so ensure you're clear on the pros and cons of \nincorporating your business\n.\nStep 4: Figure out how much you have to pay\nTo calculate the self-employment tax, multiply your net income by the self-employment tax rate. If your net earnings from self-employment from all businesses are $400 or more, use \nSchedule SE (Form 1040)\n to calculate your tax. \nOnce you have your answer, add it to \nSchedule 2 of Form 1040, part II\n.\nTip:\n You only have to apply the self-employment tax to 92.35 percent of your net earnings, which could save you thousands of dollars in tax payments.\nHere’s how that works. When using Schedule SE, you’ll chop 7.65 percent (or half of the self-employment tax rate) off your self-employment income \nbefore you apply\n the self-employment tax. For example: If you made $55,000 in self-employment income, you would only pay self-employment taxes on $50,792.50. That keeps almost $5,000 in your pocket.\nThe formula for this calculation is:\n[Net income x .9235 = Taxable income]\n\nStep 5: Make quarterly payments\nWhile you only report and file self-employment taxes once yearly during tax season, aim to pay them throughout the year to avoid penalties or interest charges. You should also track all the tax payments you make during the year for accurate reporting.\nYou’re eligible for estimated quarterly payments if:\nYou owe a minimum of $1,000 in federal income taxes this year, even after tax credits.\nYour withholding and refundable credits don’t cover at least 90% of your tax liability for this year or 100% of last year’s liability.\nTo pay your taxes quarterly, you should first estimate your annual earnings and calculate the amount of tax you owe using the formula from earlier. Divide that total into four payments and send those to the IRS every quarter. Remember to attach your payment to the appropriate payment voucher on \nForm 1040-ES\n.\nDon’t forget that there are deadlines. These are estimated quarterly payment due dates for 2023:\nApril 18, 2023\nJune 15, 2023\nSeptember 15, 2023\nJanuary 15, 2024\nAs for payment methods, you can opt for cash or money order through the U.S. mail or \npay online\n or through the IRS2Go mobile app.\nStep 6: Filing your self-employment tax\nThe final step to filing your self-employment tax is when all the previous steps come together. In this portion, you’ll finalize the information and forms you need to send to the IRS. \nFirst, use the results from your self-employment tax calculations to fill out \nForm 1040\n. Remember that you’ll need to provide your Social Security number or ITIN.\nAttach Schedule C (or E), which you filled out earlier. Next, report the tax calculations from your Schedule SE form on part II of the \n1040 Schedule 2\n, and attach that to your 1040.\nWhen you’re ready to send these forms off, you have a few options: The free IRS e-filing service, a third-party e-filing company, or you can send the physical forms to the \nfiling office in your state\n.\n\nNow that you can confidently file your self-employment taxes, it’s important to stay organized and ready for tax season. Track and streamline all transactions for your self-employed business and keep them separate from your personal finances with the \nSolo app\n.\nSources:  \nIRS\n\n

How to file your self-employment taxes in 2023

When you \nwork for yourself\n, it may seem easier to combine your personal and business finances; you may think about dipping into your personal savings to help fund your new business venture or using your personal debit card here and there to make business transactions. While this may seem easier up front, filing taxes and managing your finances can go much smoother if you learn how to separate business and personal expenses from the start.\nFiling business taxes requires much more documentation for things like business expense write-offs, financial reports, and payroll information, so it’s important to distinguish a clear separation between the two. In this guide, we’ll teach you how to separate business and personal finances so you can stay organized and prepared for tax season. \nNOTE: We have made a reasonable effort to provide accurate information, but we are not tax attorneys or accountants. This article is for informational purposes only, and Solo does not accept any liability for the use or misuse of this information. Consult a tax professional familiar with your state's laws.\nBusiness taxes vs. personal taxes\nSimilar to personal taxes, business owners get taxed on the income they make from their business. The biggest differences between personal and business taxes are the forms you need to fill out, write-offs you can deduct, filing requirements and deadlines you must meet when filing.\nSo, what exactly are business taxes and personal taxes and what are we paying for? \nExamples of business tax:\n \nIncome tax \nEmployment tax\nSelf-employment tax \nEstimated tax\nExcise tax \nExamples of personal tax:\n \nPersonal income tax \nPayroll tax \nProperty tax \nCapital gains tax \nEstate tax \nDo you file business taxes separate from personal taxes?\n\nDetermining whether or not you can file your business and personal taxes together or separately comes down to your business structure. \nMany business structures, aside from corporations, are pass-through entities, which means business owners will file their business taxes on their personal tax returns. If you’re a pass-through entity, you’ll file an informational federal tax return but won’t be responsible for paying corporate income tax.\nEach structure has different \nfiling requirements outlined by the IRS\n.\nPartnership\nPartnerships are pass-through entities, meaning each owner must report business income and losses on their personal tax returns using \nForm 1040\n. Partnerships must first file \nForm 1065\n to report the business's financial information. From there, each owner will receive a \nSchedule K-1\n that they will use to prepare their personal tax return. \nSole proprietorship\nAs a sole proprietor, your business structure is a pass-through entity, so you cannot file business and personal taxes separately. You will use \nSchedule C, Form 1040\n to file business income and expenses on your personal tax return. \nS corporation\nS corporations are also pass-through entities, so each individual owner will pay their portion of business taxes on their personal tax return using \nForm 1120-S\n.\nC corporation\nYou can file business and personal taxes separately as a C corporation since the IRS sees it as a separate entity from its shareholders. To report your business expenses as a C corporation you must file \nForm 1120\n.\n\nLLC\n (Limited Liability Company)\nLLCs are also pass-through entities, so the owner will report business incomes and losses on their personal tax returns. However, if your LLC has multiple members, you can elect to file as a corporation to keep your business and personal taxes separate using Form 1120. \nHow to separate business and personal expenses in 7 simple steps\n\nKeeping your business and personal finances separate starts with the formation of your business. Here are seven simple steps you can take to ensure you keep your business and personal expenses separate to make the filing process during tax season a breeze. \n1. Register your business\nDetermining your business structure and registering your business is the first and most important step in maintaining separation between your business and personal finances. As mentioned above, each type of business structure—\nsole proprietorship\n, \ncorporation\n, \npartnership\n, and \nLLC\n—has different tax filing requirements. As a small business owner, you’ll likely classify a pass-through entity, so you’ll file business income and expenses on your personal income tax return.\nHowever, \nincorporating your small business\n may allow you to keep your personal and business finances separate, as it’ll be a separate legal entity. If you want to keep your business tax return and personal tax return separate, it’s best to register your business as a C corporation or LLC and elect to file as a corporation. \n2. Apply for an EIN\nAn employer identification number (EIN) also known as a Federal Tax Identification Number, is a nine-digit number issued by the IRS to identify your business for tax purposes. Think of it as a social security number for your business. Business entities operating as a corporation, LLC, or partnership must obtain an EIN. \nIf you operate as a sole proprietor, you aren’t required to obtain an EIN and can use your social security number when filing your taxes. However, you can still get one. If you plan to open a business bank account, it may be smart to get an EIN, as some banks require this when opening a business account. \nTo obtain an EIN, you can: \nApply online:\n Complete the \nonline application\n and receive your EIN immediately. \nApply by fax:\n Complete \nForm SS-4\n, fax it to the \nappropriate fax number\n, and receive your EIN within four business days. \nApply by mail:\n Complete \nForm SS-4\n, mail it to the \nappropriate address\n, and receive your EIN within four weeks. \n3. Open a business bank account\nNext, you’ll want to open a dedicated \nbusiness bank account\n. This is the easiest way to ensure you keep your business and personal finances separate. It’s best to start with a business checking account, so you can use it to pay bills and make day-to-day business transactions. \nEven if you are a sole proprietor and have to file your personal and business taxes together, a business bank account will allow you to track your business’ income and expenses separately. This will make it easier to distinguish your business income from your personal income during tax time. \nA business bank account can help build your business line of credit, gives you easier access to \nsmall business loans\n, and helps protect your personal information, since you have to use an EIN as opposed to your social security number. \nTo open a business checking account, you’ll need: \nPersonal identification, like an ID or passport\nEmployer identification number (EIN) \nBusiness details, like your business name and address \nAny supporting documents, like your business license \nMinimum opening deposit if the bank requires one \n4. Get a business cash card\nNext, you’ll want a dedicated business card to make any business transactions. This is just another way to keep your personal and business expenses separate. \nA \nbusiness debit card\n is used to spend the funds you have available in your business checking account with no interest charges, credit limit, or other requirements. You can also quickly withdraw cash from your account if you need to. \nA \nbusiness credit card\n is used to make business transactions that you can pay back later. It can also help you establish your business credit, increasing your chances of getting a business loan. However, there are more requirements, like a credit limit and interest. \nSolo’s business cash card makes it easy to spend money on your business while helping you keep track of expenses and payments all within the app. \n5. Keep track of your expenses and keep receipts\n\nStaying organized by \nkeeping track of your business expenses\n will make filing your taxes so much easier. When tax season rolls around, you won’t have to worry about digging up receipts, invoices, and bank statements at the last minute. \nBusiness expenses are any costs related to running your business. Here are a few tips for successfully tracking your expenses.  \nAutomate with accounting software\nManually tracking your business expenses can become tedious and time-consuming, especially as your business grows. Accounting software makes it easy to keep track of and organize your expenses, saving you a ton of time you’d spend manually inputting information. \nThe great thing about accounting software is that it also has other built-in tools that can give insight into how your business is doing financially, like reporting tools. \nSave and digitize your receipts\nIt’s important to keep receipts for every business transaction you make, so you have a proper log of your business purchases. Come tax time, you’ll need to reference these expenses when determining your tax deductions. \nYou can keep paper receipts and invoices in a folder, but digitizing them is a safe and easy way to ensure they’re all in the same place. The accounting software you choose will likely have a feature that allows you to scan the receipts using your phone. \nMonitor business use of personal items\nThere may be some instances where you use personal items for business use, like using your car, home office, or personal phone. In this case, make sure you’re properly tracking when you’re using them for business purposes. For example, tracking your mileage when using your car and keeping your gas receipt. \n6. Pay yourself\nYou want to avoid using your business funds for personal needs, so paying yourself a salary is necessary to maintain a clear boundary between your personal and business finances. \nJust as you’d get a paycheck from an employer, pay yourself a salary twice a month (or on a schedule that works for you). Transfer the funds from your business account to your personal account, or set up an automatic transfer on the same day each month, so you don’t forget. \nYou may be wondering, how much should I pay myself? Here are a few things to consider: \nWhat is your monthly net income?\n This will help you understand how much profit your business generated after you’ve subtracted your business expenses. \nDo you have enough money set aside for taxes?\n A good rule of thumb is to set aside 30% of your net income to go toward paying your business taxes. \nHow much do you need to cover personal expenses?\n This will give you a realistic estimate of how much money you’ll need to pay yourself to cover your bills and other personal expenses. \nWhat is a reasonable monthly salary that won’t put my business finances at risk?\n Based on your monthly net income, tax savings, and personal expenses, determine how much you can comfortably afford to pay yourself. \n7. Prep for tax season year-round\nThe final step in keeping your business and personal finances separate is filing your taxes, which should be easy if you’ve followed the steps above. Preparing for tax season all year will set you up for success come time to file. This means setting aside a portion of your earnings for taxes. \nWhen running your own business, you may be required to file taxes quarterly and annually. \nQuarterly taxes:\n On a quarterly basis, the IRS requires small business owners to pay \nestimated tax\n if they expect to owe $1,000 or more in taxes or $500 or more for corporations. \nForm 1040-ES\n includes a worksheet that can help you determine your estimated tax. \nAnnual taxes:\n You will still need to file your annual federal income tax return at the end of the year. If you didn’t pay enough in your quarterly estimated tax payments, you will have to pay the remaining balance after you file your tax return. If you paid too much, you could receive a refund. \nPaying quarterly taxes may seem like a drag, but you might find it easier to pay smaller installments than having to fork over a bigger lump sum at the end of the year. Make sure you’re staying ahead of filing deadlines for quarterly taxes to avoid penalization. \nHow to separate business and personal taxes\nLearning how to separate your business from your personal expenses helps make tax filing easy. Now that we understand how to keep business expenses separate, here’s how to separate business and personal taxes so you’re prepared to file.\n1. Organize and gather what you need to file your taxes separately\nWhen you work for yourself, you’ll need to gather a few more documents and additional information than you would need when filing your personal tax return. If you’ve stayed on top of your business finances throughout the year, accessing this information should be no problem. \nBusiness tax documents needed\nHere are some things you may need to gather when filing business taxes: \nSocial security number or EIN \nLast years tax return \nInvoices and receipts \nBills \nSales records \nBank statements \nCredit card statements \nRecord of deductible expenses you plan to claim \n\nProof of income\n\nBalance sheet \nIncome statement \nCash flow statement\nBusiness loan records, including accrued interest and payments \nThe appropriate tax forms for your business structure \nPayroll information (if you have employees)\nPersonal tax documents you need\nWhen filing your personal income tax return, here are some documents you may want to gather ahead of time: \nSocial security number \nLast years tax return \nIncome statements (W-2’s, 1099 forms) \nDependent information \nMortgage interest statement \nStudent loan interest statement \nCharitable contributions \nIRA contributions \nEducation expenses\nChildcare expenses \nMedical expenses \nHealth insurance \n2. Know the common tax deductions\nTax deductions, or tax write-offs, are business expenses that you can subtract from your taxable income to lower the amount you owe when you file your tax return. Careful planning and organization of your business finances can help you accurately calculate your yearly tax write-offs. \nCommon business tax deductions\nHere are some common \ntax deductions\n you should keep in mind before you file your business tax return: \nDeduction\nWhat’s eligible?\nPercentage deductible\nHome office expenses\nUtilities, rent or mortgage, phone bills, internet bills, etc.\nAmount based on how much you used for business\nAdvertising and marketing expenses\nBusiness cards, social media ads, flyers, etc.\n100%\nSelf-employment tax\nSocial security and Medicare taxes\n50% of what you pay in self-employment taxes\nBusiness use of car\nMileage, gas, etc.\n100%\nBusiness interest\nCredit card interest, investment interest, property interest, etc.\n30% of your adjusted taxable income\nTravel expenses\nCost of plane tickets, rental car, hotel, meals, etc.\n100%\nStartup costs\nSupplies, licensing or permits, insurance, advertising, etc.\nUp to $5,000\nEducational expenses\nBooks, tuition, supplies, etc.\n100%\nInventory expenses\nCost of products, labor costs, storage costs, etc.\n\nInsurance\nHealth insurance, business continuation insurance, property insurance, etc.\n100%\nOffice supplies and expenses\nFurniture, printers, computers, etc.\n100%\nBusiness bad debt\nBusiness loan guarantees, loans to suppliers, etc.\n100% (for fully worthless debt)\nCommon personal tax deductions\nWhen it comes to personal taxes, there aren’t as many write-offs to deduct from your taxable income. Generally, people take the standard deduction—an automated deduction taken from your taxable income. The standard deduction varies depending on your filing status, whether you’re 65 or older, and whether another person claims you as a dependent. \nHowever, if you paid property taxes or student loan interest, for example, those qualify as deductions and are considered eligible for write-offs. In this case, you can choose to itemize your deductions as opposed to taking the standard deduction. \nHere are some common personal tax deductions you should consider ahead of filing: \nStudent loan interest\nHealth care premiums \nRetirement contributions \nMortgage interest \nProperty taxes\nCharitable contributions\nNote: Ensure you only report tax deductions once\nTo make sure you don’t accidentally report your personal tax deductions on your business tax return (and vice versa) you’ll want to make sure you have all of the proper documentation separated, so you only file the write-offs once. This is why staying organized during the year is important—it makes tax filing easier and limits small mistakes.\nThough pass-through entities file their business income and losses on their personal tax returns, you’ll still want to keep business and personal write-off documentation separate to ensure you’re filing an accurate tax return. \n3. Stay on top of filing deadlines and other tax dates\nThough some business structures have the same filing deadline as your personal tax return, some have an earlier deadline. You’ll also want to make a note of filing deadlines for estimated taxes, as well as deadlines for filing an extension. If you owe taxes and miss your filing date, you may receive a penalty and have to pay. \nBusiness tax dates and deadlines\nHere are the tax filing deadlines and dates you need to know when filing your business taxes.  \n\nWhat’s due?\nDate\nWho does it apply to?\n2022 4th quarter estimated tax payment\nJanuary 17, 2023\nAll businesses\nDeadline to send out W-2 forms to employees\nJanuary 31, 2023\nAll businesses\nDeadline to send 1099 forms\nJanuary 31, 2023\nAll businesses\nDeadline to file yearly tax returns\nMarch 15, 2023\nPartnerships, S corporations, and multi-member LLCs\nDeadline to file an extension\nMarch 15, 2023\nPartnerships, S corporations, and multi-member LLCs\n2023 1st quarter estimated tax payment\nApril 18, 2023\nAll businesses\nDeadline to file yearly tax returns\nApril 18, 2023\nSole proprietorships, C corporations, and single-member LLCs\nDeadline to file an extension\nApril 18, 2023\nSole proprietorships, C corporations, and single-member LLCs\n2023 2nd quarter estimated tax payment\nJune 15, 2023\nAll businesses\n2023 3rd quarter estimated tax payment\nSeptember 15, 2023\nAll businesses\nDeadline to file returns with an extension\nSeptember 15, 2023\nPartnerships, S corporations, and multi-member LLCs\nDeadline to file returns with an extension\nOctober 16, 2023\nSole proprietorships, C corporations, and single-member LLCs\n2023 4th quarter estimated tax payment\nJanuary 15, 2024\nAll businesses\nPersonal tax dates and deadlines\nUnless you file an extension for your personal tax return, there’s only one important date you need to remember when filing your personal taxes—\nApril 18th, 2023\n. If the filing date lands on a weekend or holiday, you’ll have until midnight the following business day to file. \nIf you’d like to file an extension, you’ll need to submit \nForm 4868\n by April 18th, 2023, and you will have until \nOctober 16th, 2023\n to file your personal tax return. \nKeep personal and business expenses separate with Solo\nFiling taxes when you’re self-employed can be tricky, but staying organized and properly separating business and personal expenses can take some stress off your plate when tax season rolls around. \nSolo can make it easier for you to pay expenses and track your spending. Make purchases for your business from your Solo account balance with the Solo cash card. Your customers can also pay you using multiple payment methods, like Apple Pay, Google Pay, and other traditional payment methods. An all-in-one place for freelancers, sole proprietors, contractors, and small business owners to pay, get paid, and track their spending. \nLearn more at \nSolo.co\n. 

Guide to separating business and personal finances for a streamlined tax season

Starting your own business can feel overwhelming, especially when it comes to costs and filing taxes. Luckily, there are tax break benefits you can take advantage of, including car, home, insurance, education, and retirement costs. \nIf you want to \nstart your own business\n or already work for yourself, here are 15\n \nself-employed tax deductions to take this year.  \nNOTE: We have made a reasonable effort to provide accurate information, but we are not tax attorneys or accountants. This article is for informational purposes only, and Solo does not accept any liability for the use or misuse of this information. Consult a tax professional familiar with your state's laws.\nWhat is the self-employment tax deduction? \n\nThe self-employment tax deduction is a deduction the IRS gives to self-employed workers to soften the heavy costs of starting your own business. This self-employment tax deduction provides great benefits for entrepreneurs who have sole proprietorships, partnerships, and limited liability companies (LLCs).\nThose who are self-employed can deduct their business-related expenses on \nSchedule C\n of Form 1040 during tax season. If you’re eligible, you can deduct up to 20% of your qualified \nbusiness income\n (QBI). \nNote: \nAs of 2022, the self-employment tax rate is 15.3% of net earnings, consisting of 2.9% Medicare tax and 12.4% Social Security tax.   \n15 Tax deductions for the self-employed \n\nMany self-employed individuals can take advantage of tax deductions, including writers who work from home, rideshare drivers, designers, photographers, consultants, and more. \nHere are 15 self-employed tax deductions you can file on your next tax return.\n1. Vehicle use  \nIf you use your personal car to make business-related trips, such as making deliveries or performing other services, you can deduct the mileage when tax season rolls around. When it comes to claiming vehicle use on your taxes, there are two options: \nStandard mileage: \nThis allows you to deduct the number of miles you used for business purposes. \nActual expense: \nThis option requires you to calculate how much it costs to operate and maintain your car for business use. \nWhat you need to know: \nYou can file tax deductions for vehicle wear and tear or mileage on your tax returns.  \n2. Home office \nRunning a business out of your home has its perks—including deductions on home office expenses. With this, you’re able to deduct the costs of: \nUtilities \nA portion of your rent or mortgage \nProperty taxes \nMaintenance \nYou can also deduct your home office supplies that you use in day-to-day operations. \nWhat you need to know: \nFirst, find out the percentage of the square footage in your home that you use for your business-related activities. That percentage of your rent or mortgage may be deductible according to the \nIRS\n. \n3. Business insurance \nIf you run your own business and have employees, you can consider deducting your business insurance premiums. This includes: \nEmployee accident insurance \nEmployee health insurance \nWhat you need to know: \nWhen deducting business insurance, you’re only able to claim the amount for the tax year it relates to. For example, if you paid $20,000 on Jan. 1 2022 for a business insurance policy that covers two years, you can only deduct $10,000 each of those two years. \n4. Advertising expenses \nBoosting your business’s or \nside hustle’s\n presence can carry a cost—especially when it comes to advertising efforts. You may be eligible for a deduction if you pay for any of the following: \nFacebook ads \nGoogle ads \nBillboards\nBusiness cards \nTV commercials \nFlyers \nWhat you need to know: \nSchedule C\n contains a line where you can report your advertising expenses.  \n5. Some memberships  \nSome memberships may be tax deductible, such as for a professional organization related to your industry of expertise. A professional organization can include: \n\nChambers of commerce\n\nBusiness leagues  \nMedical or bar associations\nReal estate boards \nTrade associations\nPublic service organizations \nWhat you need to know: \nThis does not apply to country club memberships. A legitimate membership does not provide entertainment or access to facilities that provide entertainment. \n6. Education development \nRunning or starting your own business takes expertise and knowledge, so continuing your education is important. You can deduct educational development from your self-employment taxes — this can be anything educational, including:  \nBooks \nSupplies \nSchool tuition \nClass costs \nLab fees\nTransportation to and from education-related locations \nWhat you need to know: \nAccording to \nPublication 970\n from the IRS, you can deduct these expenses only if they “maintain or improve skills needed in your present work.” \n7. Start-up costs \nCosts can add up when you \nstart your own business\n—but there may be an opportunity for you to deduct the expenses you made to get everything up and running. This self-employed tax deduction usually includes the costs of: \nGrand opening advertising \nWages and salaries for your employees\nConsulting fees \nBusiness-related travel \nWhat you need to know: \nAccording to \nPublication 535\n, if your organization’s start-up costs do not exceed $50,000, you may be able to deduct up to $5,000. \n8. Health insurance premiums  \nHealth insurance premiums may also be deducted from your tax returns. Self-employed workers can obtain health insurance by filling out a \nMarketplace application\n or qualifying for low-cost coverage through \nMedicaid and CHIP\n programs. \nIf you’re self-employed, you can usually deduct these as a business expense. To do so, you must show one year of a net business profit. \nWhat you need to know: \nThese deductions include dental, medical, and long-term care plans for you and your spouse, dependents, and kids under the age of 26.  \n9. Phone and internet bills \nPhone and internet bills are usually all part of the job—especially if you \nwork from home\n. As a self-employed worker, you can have your phone and internet bills deducted. \nWhat you need to know: \nMaintain a record of your internet and phone usage and only deduct the percentage that was used for business-related purposes.  \n10. Travel expenses \nIf your business operations require you to travel frequently, then you may be able to deduct those expenses. This business travel deduction covers accommodation and travel costs but does not include leisure or entertainment costs. Some of these expenses include: \nCost of plane or bus ticket\nCost of meals \nCost of hotels \nBe sure to keep accurate records and receipts of all business-related travel expenses to make reporting easier. \nWhat you need to know: \nThe \nIRS\n allows you to deduct 100% of all business-related travel and 50% of meals. \n11. Loan and credit card interest  \nKeep track of your business \ncredit card\n statements to receive potential tax deductions on interest that was gained from business-related purchases. Additionally, almost any interest you pay on a loan is tax deductible. \nWhat you need to know: \nA tax-deductible loan can include term loans, business lines of credit, short-term loans, and personal loans, but only if they're business-related. \n12. Retirement plan contributions \nIf you’re self-employed, you may be able to expense retirement plan contributions that you make to a qualified retirement plan, such as a 401(k). Even if you’re a small, one-person business, you can still set up your own 401(k).  \nWhat you need to know: \nDuring tax season, you’re able to make annual salary deferrals up to $20,500 as of 2022. \n13. Subscriptions and publications  \nThose business-related subscriptions and publications you’ve signed up for can also be tax deductible. The types of subscriptions you can deduct as a business expense include: \nTrade, medical, technical, or professional magazines or journals that are related to your business \nTool, software, and even business supply subscriptions like printer ink\nFees from hosting your business website \nWhat you need to know: \nAdd these deductions on Form 1040 Schedule C as “other expenses.” If you have a subscription that is prepaid for over a year, you can prorate the cost for each year to deduct that. \n14. Qualified business income  \nThe qualified business income (QBI) deduction is the net amount of qualified items of deduction, loss, income, and gain that are related to any business or trade. In general words, it’s your business’s net profit. This does not apply to any business income earned outside of the U.S. \nWhat you need to know: \nThe qualified business income (QBI) deduction allows those who are self-employed to deduct up to 20% of their QBI on taxes—this only applies if your combined business and personal income is below $164,900 for single filers or $329,800 for joint filers. \n15. Self-employment taxes  \nAdditionally, you can deduct self-employment taxes as a \nbusiness expense\n. Social Security and Medicare taxes are deducted from self-employment taxes. The self-employment tax rate is 2.9% for Medicare and 12.4% for Social Security—15.3% total of all net earnings.  \nWhat you need to know: \nWhen filing your income tax return, you can deduct half of your self-employment tax on \nForm 1040\n.  \nHow to calculate self-employment tax \nTo calculate your self-employment tax, you first need to figure out the net earnings that you made in self-employment for the year. This is usually \ngross income minus business expenses\n. \nAbout 92.35% of your net earnings may be subject to taxation—once you’ve figured out how much net earnings are subject to taxation, apply the 15.3% tax rate.\nSelf-employment tax deductions FAQ \nStill curious about self-employment tax deductions? Explore the frequently asked questions below.\nWhat is the 20% self-employment deduction? \nThe 20% self-employment tax deduction is placed on net business income. This tax deduction applies to sole proprietors, \nLLCs\n, partnerships, pass-through entities, and shareholders in S and C corporations. \nWhat deductions can I claim without receipts?\nIt’s difficult to keep track of all of your day-to-day receipts. With that being said, there are some deductions that you can claim without receipts. These deductions include: \nLoan interest\nMaintenance \nInsurance \nFuel \nRegistration \nCharitable donations \nMembership fees \nIt’s always safe to keep track the best you can and log your credit card statements to make things simpler when tax season approaches. \nIs car insurance a tax deduction?\nCar insurance is considered a self-employment tax deduction. Those who are self-employed can deduct car insurance from their taxes. When it comes to your business-related vehicle, there are a few other deductions you can add, including: \nGas and oil \nTires\nTolls and parking fees\nCar repairs \nGarage rent \nLease payments \nRegistration fees \nDepreciation \nReceive a tax break as a one-person business  \nConsider these self-employed tax deductions if you \nwork for yourself\n or are looking to get your new business off the ground—they can be especially helpful if you want to find ways to save some extra cash. Be sure to sign up for a separate \nbusiness credit card\n to make reporting your expenses simpler when tax season begins.  \nSolo makes it easy to pay, get paid, and track spending\nSolo is not a bank, but is a financial super-app for small businesses, freelancers, sole proprietors, contractors, and more. Solo is the easy way to pay, get paid, and keep track of your spending. Your customers don't have to sign up to pay you, and can use several payment methods, including Apple Pay, Google Pay, and cards. QR codes make it easy to get paid, and you can easily cash out your Solo account balance for free, or spend it using your Solo Cash Card anywhere Visa is accepted. Learn more at \nSolo.co\n.

15 self-employed tax deductions and benefits

Sorting through credit card charges and paper receipts can be an overwhelming and time-consuming process to handle while running your own small business. Especially if you have to retroactively sort through and categorize personal and business expenses, it can cause even more wasted time and unnecessary stress. \nOverall financial management is essential for the success of any business—it can help you track your cash flow and determine where to cut down or supplement certain areas of your company. To get a more clear picture of these factors, you’ll need to stay organized with your finances. Read more to learn how to keep track of your small business expenses and why it’s important. \nQuick overview: What are business expenses? \n\nBusiness expenses are the costs related to running a business. Also known as deductions, business expenses are recorded on your income statement. These expenses are subtracted from the revenue to determine the net profit or loss, as well as taxable income. \nAccording to \nSection 162 of the Internal Revenue Code,\n as long as the expense is considered necessary and ordinary, it can be reported to the IRS to reduce tax liability. \nOrdinary expenses refer to those that are common in the trade or industry in which your business operates. Below are some common business expenses that can be \npartially or fully tax deductible: \nBusiness mileage and some business travel costs\nFurniture\nMarketing and advertising\nInsurance\nLegal fees\nRent or office lease\nSoftware\nOffice equipment and supplies\nEmployee benefits\nEducational expenses for employees\nCommissions\nBank fees and interest\nExamples of business expenses that are\n not tax deductible include: \nDemolition losses or expenses\nEducational expenses required to conduct a business\nFines and penalties from the government\nPolitical contributions\nAny illegal activities\nWhy is tracking business expenses important? \n\nThere are many benefits of tracking business expenses. It’s not only important for seeing what qualifies as a tax deduction but also helps you understand how to better manage your cash flow. Here are some reasons why tracking business expenses is so important:\nHelps you create a budget and manage cash flow \nTo know how much money your business has and how much room you have to spend, you need to create a budget—that’s where tracking expenses comes in. As you develop better tracking habits, you’ll be able to categorize your expenses and create an accurate budget for your business to manage your cash flow.  \nTracking expenses and making a budget can help you become more financially aware, which is beneficial to the overall health of your business.    \nIdentifies real-time ways to save money \nHaving a visual of what your business spends each month can help you spot areas where costs have either increased or decreased and where you should allocate your money. You’ll also be able to see if there are any areas where you can cut costs altogether, saving you money in the long run. \nAllows you to take advantage of reward perks \nCreating a separate business account and obtaining a business credit card is part of the process of tracking your business expenses. Business credit cards offer many perks, such as free hotel stays and airline points that can keep you and your employees (if you have any) happy.  \nTracking your business expenses enables you to provide any employees with quick reimbursements when they pay for meals, gas, or flights out of their own pocket. By staying organized with these expenses, you can ensure you pay them back quickly, which also helps with employee satisfaction. \nProvides a benchmark against other industries \nIf your business begins tracking expenses, you can compare and contrast these expenses with competitors in the industry. You’ll have a clear idea of where your money is going and will allow you to create benchmarks to see how you stack up against others. \nThis can help you look for opportunities to cut expenses if you see you’re overspending compared to competitors. \nNow that you’re aware of the importance of tracking business expenses, read on to learn how to get started in seven simple steps. \n7 steps to track business expenses  \n\nBusiness expense tracking requires a little more effort than just storing paper receipts in a dusty shoebox. Keep reading to explore the steps involved in the expense tracking process. \n1. Open a business bank account  \nThe most important step to successfully tracking your business expenses is to make sure that your business expenses are separate from your personal expenses. With separate finances, you can more easily do your taxes and avoid overspending.\nIf your business is a corporation or LLC, you’ll be required to open a \nbusiness bank account\n. There are many business credit cards to choose from, so review your options carefully. Here’s what you’ll need to open a business bank account: \nBusiness name\nEmployer Identification Number (EIN) \nSocial Security number (SSN)\nOrganizing documents (LLC, corporation, partnership docs, etc) \nBusiness license\nAfter opening a business bank account, apply for a \nbusiness credit card\n to take advantage of the different rewards and perks it offers, as well as build business credit. If you have employees, consider also getting employee expense cards to track their payments—these types of cards have personalized spending limits and are linked to an approving manager, limiting the risk of reckless spending.  \nTip: \nIf you operate as a sole proprietorship, it’s not required to open a business bank account, but it’s recommended to get a business credit card to help separate your finances. \n2. Determine your accounting method  \nAs a business, you must decide how to report income and expenses, which helps establish a consistent and accurate process for tax season. Small businesses with $25 million or less in annual gross receipts for the last three tax years can choose between the following:\nCash accounting: \nThis is the most common method used by small businesses. It’s the process of recording income as you receive payment and recording expenses after they’re paid. \nAccrual method:\n This method records income when it’s earned and records expenses when they’re incurred, rather than when you receive payment.\nTip: \nCash accounting is a much simpler process than the accrual method because it only accounts for cash received. The accrual method doesn’t track cash flow and might not identify major short-term cash shortages, plus you also have to account for things like prepaid expenses and unearned revenue. \n3. Get accounting software\nAutomate your business expense tracking with accounting software. Many business owners will try to track these expenses themselves with Microsoft Excel, but this method is more prone to human error.\nAccounting software is a simple and easy way to monitor, pay, and organize expenses, allowing you to allocate more time to other business needs. Popular software includes: \nQuickBooks Online \nXero \nFreshbooks \nWave \nZoho Books \nTip: \nMany accounting software programs are cloud-based solutions, meaning you can avoid misplacement or loss of information. They tend to also come with reporting tools that provide insights into your spending on a year-over-year basis. \n4. Digitize your receipts   \nAfter obtaining accounting software, start getting into the habit of digitizing your receipts. This is one of the many helpful features of accounting software—it will also likely feature the ability to scan receipts using a mobile phone camera through the use of an app. \nAccounting software uses optical character recognition (OCR) technology that turns text from receipts into machine-readable code, which is then stored in your expenses tracker. Some paper transactions you’ll want to consider digitizing include: \nInvoices \nExpense claims \nReceipts\nTip: \nMake sure you scan your receipts clearly. As you scan, ensure you can read the vendor’s name and address, the purchase date, and the amount you paid.\n5. Connect your small business bank account   \nThe next step involved in tracking your small business’s expenses is to connect your business bank account to your accounting software so you can import all transactions. There are several ways to do this: \nManual upload:\n You may choose to download bank and credit card statements into a CSV file, which you can then upload into the software. \nData import:\n Many accounting software tools have a connectivity plug-in that you can use to automatically import data dailys. \nConnect with bank account:\n Some accounting software programs offer integrations with your bank—in that case, you would connect your small business bank account. With this method, you’d be able to complete and manage all banking within the accounting software without needing to also input data to your bank account portal. \n6. Hire a bookkeeper \nIf your company is growing or you don’t want to spend additional time sorting through numbers, you may want to consider hiring a bookkeeper. They can use the accounting software to track invoices and receipts and do the heavy lifting for you. \nUsing a professional bookkeeper can also help avoid tracking errors and ensure proper records, so that you stay off the IRS’s radar. \nTip: \nIf hiring a full-time bookkeeper is out of your budget, you can also consider hiring one on a contract basis, like before tax season.  \n7.  Categorize and review your expenses regularly\nOnce you’ve implemented a tracking process, it’s crucial that you review and categorize your expenses regularly. If you’re unsure of how to categorize your expenses, some common categories include: \nOffice supplies \nTravel expenses \nDaily expenses \nUtilities and office rent \nVehicle expenses (like gas and maintenance)\nEmployee expenses \nTip: \nCreating categories of your expenses also makes it easier to look up data when needed and will help you stay better prepared for tax season. \nTracking business expenses may seem like a ton of work, but with these tips and the right tools, you can simplify the process and avoid stress during tax season. You’ll be able to rest assured that your business’s documents are organized and know that you have a better idea of your financial standing. \nSolo makes it easy to pay, get paid, and track business spending\nSolo is not a bank, but is a financial super-app for small businesses, freelancers, sole proprietors, contractors, and more. Solo is the easy way to pay, get paid, and keep track of your business spending. Your customers don't have to sign up to pay you, and can use several payment methods, including Apple Pay, Google Pay, and cards. QR codes make it easy to get paid, and you can easily cash out your Solo account balance for free, or spend it using your Solo Cash Card anywhere Visa is accepted. Learn more at \nSolo.co\n.

How to track small business expenses: 7 steps and tips

A sinking fund is a fund containing money that you set aside to pay off a bond, debt, or other large upcoming expense or purchase. These types of funds can help your or your business take manageable steps toward your end goal and are a beneficial component of your financial strategy. Or, if you \nwork for yourself\n, a sinking fund can also be a great way to save for your goals. \nIn this guide, learn more about what a sinking fund is, the benefits, different types of sinking funds, how to set one up, and other factors to consider before adding it to your business strategy. \nWhat is a sinking fund?   \nAs stated above, a sinking fund is money you save or the accumulation of capital to prepare for an out-of-the-ordinary, predetermined expense. The term “sinking” refers to the decreasing amount of debt you have remaining as you pay it off.  \nHaving a sinking fund is important for your business because it helps ease the burden of paying any debts owed. \nSinking fund examples \n\nThere are several common examples and forms of business-related sinking funds. They include: \nInsurance premiums:\n These premiums make sure your business has enough money to cover any unexpected occurrences. \nTaxes:\n Taxes ensure your business has money in the future to pay taxes on future earnings.   \nQuarterly loan payments:\n Loan payments ensure your business has enough money tucked away to help pay down accumulated debts. \nOther common examples of sinking funds for individuals include medical expenses, vacations, holiday gifts, and costly home repairs.  \nSinking funds vs. emergency funds vs. savings accounts  \nWhile they are similar concepts, sinking funds and emergency funds are not the same thing. While an emergency fund should be set in place for an event that occurs unexpectedly, a sinking fund is reserved for a planned and specific expense. \nEmergency funds are also similar to savings accounts, which are set up for long-term savings, but aren’t created for one expense in particular. \nSinking fund benefits  \n\nThere are many advantages of sinking funds, both for individuals and businesses. Explore them below. \nHelps you save money \nSinking funds help you save money and get ahead of debt, as well as achieve more financial freedom and flexibility. Saving money through a sinking fund allows you to be better prepared for specific, large expenses and will reduce the need for you to take on additional debt. \nTaking on additional debt from costly purchases can slow your debt repayment progress, so a sinking fund can be beneficial in that case. \nLowers interest payments \nIf a business has poor credit ratings, it can be a lot more difficult to attract potential investors unless they offer higher interest rates. A sinking fund can offer alternative protection for investors so that companies can offer lower interest rates. \nAdditionally, the ability of a business to buy back bonds and repay debts will not be compromised, resulting in a solid credit rating and confident investors. \nAdds an element of security  \nOnce a company creates a sinking fund, it sets money aside in a separate account with the goal of repaying its bonds. Sometimes, a business can face financial situations in which the ability to pay back debts to investors is compromised. \nWith a sinking fund, a \nsmall business\n is able to protect itself against unprecedented economic downturns because money is placed in a special account, boosting financial security. Investors will also be more inclined to purchase your business’s bonds if they know there’s a high likelihood that you’ll be able to repay your creditors with a backup sinking fund. \nUncovers tax benefits  \nThere are tax benefits that come with sinking funds, such as financial leverage. For example, sinking funds can help earn compounded interest, which helps to reduce the cost of borrowing. Also, the interest expenses will decrease proportionately to the number of outstanding bonds.\nThese tax benefits can save your business a lot of money in the long run that can be dispersed into other areas, such as cash flow.  \nTypes of sinking funds \nThere are four different types of business sinking funds, including regular payment, callable bond, purchase back, and specific purpose. Let’s explore them in depth below.\nRegular payment sinking fund: \nThese funds are used to pay creditors and trustees on a regular basis. Payments are periodically scheduled on a regular basis. \nCallable bond sinking fund:\n Callable bonds are sinking funds in which a company has a call price that’s fixed. In other words, funds are accumulated to pay the bondholders at a set call price.  \nPurchase back sinking fund: \nThis type of sinking fund is used when a company wants to buy back a bond. These bonds are purchased from bondholders and are either sold at market price or sinking fund price. \nSpecific purpose sinking fund:\n Specific purpose sinking funds are used for a single purpose and nothing else.    \nHow to set up a sinking fund: 5 steps  \n\nNow that you’re aware of what a sinking fund is and its benefits, you can set up your account. Here are five simple steps to create a sinking fund: \nOpen account:\n Create a new business account that’s designated for your sinking fund. Be sure to keep this account separate from personal and other \nbusiness expenses\n and accounts so you know exactly how much you have. \nMake a list: \nCome up with a list of items you need to save for or the debts that you need to pay down, such as taxes and insurance payments. \nAssign dates: \nAssign dates to each item(s) to signify when you need the money. \nCalculate:\n Determine how much money you or your business needs to save monthly as well as the total saved by the due date. \nSet up automatic transfers:\n Making monthly automatic transfers helps you stay on top of adding money to your fund. \nOther sinking fund considerations \nHere are some additional considerations when it comes to sinking funds: \nCan you have too many sinking funds?\nIf you have too many sinking funds going at once, you may not see much progress. Instead, avoid overwhelming yourself with too many sinking funds and only dedicate these accounts to things you really need, like debt repayments or a large business expense.  \nStriking the right balance is key — try starting with two to three accounts to cover the most important expenses first. If you are able to juggle that, consider creating more fund accounts. Setting automatic payments should help streamline the process. \nHow much money should I have in my sinking fund?\nThe amount depends on your business’s financial situation and goals. A good place to start is to take a look at what expenses need the most attention, such as debts, and then calculate how much money you need to save each month to pay them down within your desired timeline.\nReach your financial goals with a sinking fund\nSinking funds are a great low-risk saving strategy for expected future costs and paying down your business’s debt. These accounts are easy to set up and can help your business reach its goals. \nIf you’re starting your own small business, be sure to invest in a card processing system or \ncharge cards\n to make \naccepting payments\n from new customers easier. \nSolo makes it easy to pay, get paid, and track spending\nSolo is not a bank, but is a financial super-app for small businesses, freelancers, sole proprietors, contractors, and more. Solo is the easy way to pay, get paid, and keep track of your spending. Your customers don't have to sign up to pay you, and can use several payment methods, including Apple Pay, Google Pay, and cards. QR codes make it easy to get paid, and you can easily cash out your Solo account balance for free, or spend it using your Solo Cash Card anywhere Visa is accepted. Learn more at \nSolo.co\n.

What is a sinking fund? Definition and how to set one up

Knowing how to show proof of income if you’re self-employed can feel daunting, especially since you’re likely not earning a set amount each pay period. Showing proof of income for self-employed workers requires additional preparation and organization than it usually does for the traditional employee. \nWith this guide, showing proof of income if you’re \nself-employed\n is easier than ever. Read on to learn about why you need to show proof, the specific documents you need, and other tips.  \nWhat is proof of income?\nProof of income is paperwork that provides insight into your earnings during a certain period of time, usually a full year. The documents are proof that what you say you make is what you actually make. Those that require proof of income usually include: \nInsurers\nBanks \nLandlords\nCredit companies \nUtility providers\nThese entities will use proof of income paperwork to determine if you are qualified and able to make payments on time for an extended period. \nWhy proof of income matters\n\nThere are certain instances in life where you’ll need to show proof of income, typically whenever lending money is involved. This documentation is required for activities such as: \nFiling taxes\nApplying for a credit card \nObtaining health insurance \nApplying for a rental \nApplying for personal loans \nLeasing a car \nApplying for a mortgage \nAside from filing taxes, these events involve issuers letting you borrow money—this requires a certain level of trust that you’ll be able to pay back what’s owed. Proof of income matters because it’s the proof that you have funds and cash flow to make payments. \nHow to show proof of income when you’re self-employed\n\nFor full-time employees at traditional workplaces, showing proof of income is easy—all you need is a W2, a pay stub, or tax returns. Self-employed individuals can typically provide the same information, but there are a few caveats with each: \n1. Tax returns  \nOne of the easiest ways to show proof of income is through your annual tax returns. A tax return is a legal form from the Internal Revenue Service (IRS) that states your total earnings and expenses for the year. \nIf you’re purchasing a large item, such as a home, the more detail you can provide in your tax returns the better. If you don’t have this form on hand when you need to show proof, you can alternatively provide your 1099 forms. \nCaveat: \nSelf-employed individuals don’t always have to report income that is below a certain threshold, so tax returns may be an underestimation of your total income for that period. \n2. 1099-MISC form \nA 1099-MISC form is used to report miscellaneous as well as non-employee business compensation for freelancers, contractors, sole proprietors, independent contractors, and self-employed individuals. It’s a record stating that a person or entity paid or gave you money for services. This form is one of the more commonly used forms in the 1099 series. You are able to file this form through the IRS online. \nCaveat: \nYou must have made at least $600 in the past year as a self-employed worker to receive this form. \n3. Bank statements \nBank statements can be used to show your income if you’re self-employed or have a side hustle. These statements can come from a savings or checking account, credit card records, or an investment account. These details are usually included in a bank statement: \nInformation about your bank and its contact information\nAccount details, like your bank account number and name \nA summary of transactions, including withdrawals and deposit\nA period of time summarized within the bank statement\nCaveat: \nIf the bank statements you show are from a personal account, be sure to go through and clearly separate your personal expenses and business expenses before presenting this info as proof of income.\n4. Profit and loss statement\nProfit and loss statements are forms that \ntrack your revenue\n, costs, and expenses from your business over the course of a year. Normally, profit and loss statements cover the following: \nYour revenue\nYour expenses \nBusiness-related deposits\nNet profits \nCosts of goods sold \nThese statements can be created on your own or with the help of credit companies.\nCaveat: \nProfit and loss statements are more easily accessed by those who operate their own businesses, but an accountant or software can help you obtain these forms if you’re a freelancer. \n5. Online payment records \nIf you’re a freelancer or sell your services or products online, chances are you use an online payment method through a service provider. These providers usually offer monthly or yearly breakdowns of payments received and issued from your account. \nCaveat: \nNot all of your income may be tracked on these platforms, but it at least provides proof that you do have a steady cash flow.  \nProof of income considerations\n\nHere are a few considerations and tips to keep in mind to make showing proof of income as simple and successful as possible:  \nStay organized:\n To make showing proof of income easier, stay as organized as possible and keep track of all business expenses and payments. \nAsk ahead of time:\n Knowing which documents lenders require will also make the process smoother. Get in touch with lenders ahead of time to see what they need. \nKeep copies of your deposit slips: \nKeeping a paper trail of deposit slips can provide proof of income since they’re a record of money going into your account. \nProof of income made simple \nShowing proof of income for the self-employed is still important even if you’re working for yourself, but it doesn’t have to be complicated. After being self-employed for a while, you’ll have a larger paper trail of proof and documentation and it will become easier to provide each time. \nIf you’re starting your own small business, be sure to invest in a \ncard processing system\n or \ncharge cards\n to make accepting payments from new customers easier. \nSolo makes it easy to pay, get paid, and track spending\nSolo is not a bank, but is a financial super-app for small businesses, freelancers, sole proprietors, contractors, and more. Solo is the easy way to pay, get paid, and keep track of your spending. Your customers don't have to sign up to pay you, and can use several payment methods, including Apple Pay, Google Pay, and cards. QR codes make it easy to get paid, and you can easily cash out your Solo account balance for free, or spend it using your Solo Cash Card anywhere Visa is accepted. Learn more at \nSolo.co\n.

6 articles found in “Taxes”

How to file your self-employment taxes in 2023

Guide to separating business and personal finances for a streamlined tax season

15 self-employed tax deductions and benefits

How to track small business expenses: 7 steps and tips

What is a sinking fund? Definition and how to set one up

Proof of income for self-employed: What you need + tips

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