For 2024, I was self-employed as a computer programmer. I worked exclusively with one client, and invoiced them directly. They paid me via wire transfer every month.
I have all the invoices. I did not make a separate business entity (it’s just me, under my name).
Now that it’s time to do my taxes for last year, I would like some help figuring out how to file correctly, but I’m not sure who to go to. Is a normal “CPA” enough? Is that what businesses like “HR Block” are, or they something different? What’s a good one to go to?
Sorry for the ignorance here. I’ve been an employee most of my life and never had to worry about this stuff
Just looking for help figuring out deductions, etc. I had to pay for office equipment / computers / software / coworking space / etc. Also had a Marketplace health plan that I contributed to out-of-pocket. If it matters, I didn’t make much money… just a bit over $30k gross. Was working part-time while going to school for much of the year.
Everything you do will be filed on schedule C or C-EZ along with your personal 1040. There is no separate return for your biz. The way you’re doing it, you are your biz.
The turbotax version that says it does sked C is all you need. Likewise for other brands of tax prep software if you already use a different brand.
In terms of knowledge what you need to know is real close to “if you spent it in furtherance of the biz it’s a deductible expense.” And conversely “if you’d have spent it anyhow for your personal life, it’s not.”
Got it. Thanks for the detailed advice! I’ll try that first, then.
Is there any brand of tax prep software you’d recommend? I’d rather not support Intuit if possible (because of 1), but will this one time if I must. I expect to become an employee again soon.
I’ve been self-employed for a long time, and for the last few years, I’ve used H&R Block. I’m happy with them.
Regarding a “business entity,” I had to set up an account with my county government for tax purposes (YMMV). I also pay state and federal income tax as an individual (as noted by LSLGuy), which takes the form of quarterly estimated payments to cover what I anticipate owing for the year when I file. If I don’t make the payments, or if I don’t pay enough, there’ll be a penalty that won’t break the bank, but I’d rather avoid it. Your tax person can help you figure out how much you should pay quarterly, assuming you anticipate your 2025 income to be reasonably close-ish to what you made in 2024.
I apologize if I’m telling you stuff you already know. But the tone of the OP kinda leaves that detail in question, and it’s important, so it shouldn’t be left unsaid.
And yes, make sure you keep records of all your business expenses (and it sounds like you did) because if you go to a pro, they’re likely to ask a whole lot of questions looking for deductions.
I actually had no idea I was supposed to be paying this quarterly, instead of as a lump sum at the end of the year. Whoops Penalty it is, then!
And thank you. I’ll end up going to HR Block if the self-service software isn’t enough (but hopefully it is… sounds like my situation is standard enough.)
My only experience is turbotax. I’ve used it since it was invented. So I have no comparative knowledge of others. Sorry.
I have my irritations with it, and will probably test-hop switching for 2025’s filing a year from now. Not for any pique about their politics; just cost, features, & convenience. They’re getting long in the tooth & it shows. Besides, retiree tax is dirt simple.
I will give a different answer. I was a self-employed consulting software engineer for about 20 years. I always used a CPA to do my taxes. There are too many issues that I didn’t have the knowledge to decide and didn’t want to invest the time to research myself. Are phone expenses deductible if you used your phone for business? (Possibly) Is part of your rent deductible if you worked out of your house? (Probably not) Is your internet service deductible if you worked online? (Questionable; talk to your CPA) Lots of little things that I didn’t want to worry whether I was getting right myself.
Going forward, yes you should definitely be paying estimated taxes quarterly. The right amount to pay is based on your previous year’s tax return. Your CPA will calculate that amount for you. They can also answer any questions that might arise during the year, like what to do about this letter I got from the IRS saying I still owe an extra $1000, or whether the new computer I’m about to buy will be deductible, which might affect how much I want to pay for it.
ETA: BTW there is still time to pay the fourth estimated tax payment for last year. It’s due on Jan 15 I believe. If you talk to a CPA before then they may be able to tell you whether it’s worth it to do so, and how much you should pay.
Happy to be of help. Every so often, I run across people who are just starting out with self-employment who aren’t aware of that. And I’ll admit that I was one of them myself.
And I’ll second markn_1’s advice to use a CPA, especially if it’s your first time. At the very least, it’ll help get you oriented to the whole thing with less risk of something getting messed up, and you’ll learn a bunch of stuff.
You may not need a tax pro, depends on your gross receipts.
But I would say- get a Enrolled Agent to start. Cheaper than a CPA, and better for what I think you need. At least this first time, then you will know. If you do it yourself- and you certainly can- you will miss deductions.
I use Tax Act, it works a lot like the others, asks you questions and you fill in the blanks, allows you to go back at any point and make changes, up until you lock it down and file. They charge for e-filing, but you can print it out without extra charge and mail it. Looking at it, I see that your situation (“freelance or side gig income”) seems to require the highest software level at $70. Maybe others will be cheaper. Anyway, it’s not owned by Intuit, it’s owned by a private equity firm. Who may have contributed just as much to lobbying as Intuit did, but they’re not a household name so it wouldn’t get reported.
So, without paying anything, I ended up trying to do them in the H&R Block online software. All the different ones seemed pretty similar, and I was hoping this way I could easily take my work to a local office if I needed to.
Well, turns out (if my work is right), I owe some $5.5k in taxes (on $30k income), and with barely $1k left in the bank, that’s going to be quite difficult to pay, lol. I’m also not at all sure if I filled it out right. Lots of complexity regarding equipment subscriptions, deductions, depreciation, and the such. And it seems like various forms (college tuition, underpayment penalty, etc.) aren’t quite available yet, so I might have to wait till February to really finish this.
The online software, once you include talking to a tax pro online, is a little bit cheaper than doing this in person, but not by much ($200 vs $300 ish). I’m pondering whether it’s even worth it to talk to a professional at all. Without it, the online filing would just be $100.
On one hand, I’m not sure that a professional would be able to lower the amount due by much more than the automated software; it’s already in a pretty minimal bracket. On the other hand, I had no idea “self employment tax” was even a thing, and it’s apparently not subject to the regular deductions and such and ends up being way more than a personal income tax (at this level of gross income). Not even knowing that basic thing makes me feel pretty insecure about whether I did the rest of it right
Might just have to suck it up this year and talk to a professional about it. Even if it’s a few hundred dollars, it would be good peace of mind (and maybe learn some tips for next time this happens, like realizing that a home office area must be exclusively used for business).
Sigh. Gonna be a rough 2025, but at least apparently you can pay the federal tax in installments. Being an employee was so much simpler
Thanks for this, too! I looked into it, and it was my second choice. I ended up going with the HR Block just because I was worried I’d have to go into an office anyway and I wanted to talk to someone in person rather than online.
Just an FYI - “self-employment” tax is the equivalent of the Social Security and Medicare taxes that would have been paid on your behalf if you had been an employee ( half from you, half from your employer) . That’s why it’s a flat percentage. It’s one of the reasons that self-employed people normally charge a higher rate than they would have been paid as an employee. ( There are others)
When I started my one-person business 28 years ago, I used a CPA, who helped me get my accounting system set up with Quick Books. He prepared my taxes for many years and charged me something like $1,000/year. It was worth it because he knew some special aspects of my business that I might not have figured out, and saved me some money.
However, after a few years, the process became routine and I realized that I could do everything myself, filing my returns with TurboTax, which interfaced directly with QuickBooks, and cost only $70/year instead of $1,000.
Since the OP says he will probably go back to being an employee next year, I’m not 100% sure he needs an accountant now, except for the peace of mind. Your situation seems pretty simple and straightforward, and unfortunately, if you’d gone to one when you started, it would have saved you a little more, because you would have been making those quarterly payments, and you might have been able to arrange to take the home office deduction. At this point a CPA may be able to tell you about a few deductions or help you with depreciation issues, but it seems unlikely to me that he/she will save you much more than you will have to pay for the service.
BTW, believe it or not, the IRS will make corrections to your return that are in your favor.
After I retired two years ago, I continued using TurboTax out of inertia. But with no business income or expenses, the returns were so simple, even filing jointly with my wife, that last year I looked around and switched to EasyTax, which is online and free, or very nearly so. (I think there’s a small charge for state e-filing.) The UX is very similar to TurboTax.
I’m not recommending it for the OP, who seems to be on the right track, but you or others similarly situated might find it worthwhile.
My SiL has a very complicated self-employed situation, and she has Maldonia & Associates do her taxes. She gets the maximum benefit in returns, and she has never been audited. You get a certain percentage of the footage of your residence as an “office” as well as a number of other things a “regular” person doesn’t qualify for. Based on personal experience and the experience of a number of people she knows, my SiL thinks that the IRS watches self-employed returns more carefully because those people seem to be the ones that either cheat or screw up with much greater frequency.
Remember, as a contractor, you have the ability to set up and put money away in a SEP-IRA, if you have money around. That will lower your taxable income (as it is a tax-deferred account), and is similar to a traditional IRA in terms of withdrawing rules. There is a limit (something like 25% of your net earnings.) This is probably not helpful in your situation, but it’s something to be aware of. When I was doing taxes myself for the first five years or so as a sole proprietorship, I didn’t realize I had this retirement savings option. It took a CPA to point this out to me, and I’ve maxed out my SEP and Roth since.
Be careful with the home office deduction, as that is something the IRS looks out very specifically for. Read the rules carefully about what is required if you take it. There’s a couple different ways you can calculate it, one a simple method that is an amount per square foot up to a maximum, another that requires tracking individual expenses. For me, the deduction is so small that I don’t bother.
I’ve mostly been a typical salaried full-time employee, but I also have a small side business and around the 2008 recession when I wasn’t full-time I did other work through that side business. The whole time I’ve used H&R Block and have been pretty happy with them. If you tell them you need to do a Schedule C they’ll set you up with someone who’s more experienced about those things. Yes it’s more expensive, about $300 or $350, but the cost of that above and beyond normal tax prep is also a deductible business expense. It’s still a lot less than a full CPA. They’ll be able to inform you about how often you need to show a profit, what sort of expenses are or aren’t deductible, or if you can deduct a portion of them, all that good stuff. Where I live we also have municipal income taxes, and if you live and work in different cities there can be confusing reciprocity and filing guidelines. When I had to submit quarterly payments, they were always happy to set up and print out the forms I’d need, but they’d then cancel that part of the tax prep service because it’s an extra fee.
My only gripe is that they, along with companies like Jackson Hewitt, are a strong lobbying force against simplifying the tax code and free government-provided tax prep.
Disclosure, I am a CPA, although I do not do (other people’s) taxes.
I would recommend either an Enrolled Agent or a CPA. If they can save you any money they’ll almost pay for themselves, particularly as this is your first time in this situation and you have stated you are not comfortable answering some of the questions the tax software asked you about.
Second, I cannot recommend www.freetaxusa.com enough. Federal is always free to file and state costs $15, no matter how many schedules you need. The interface is intuitive and easy to use. I find it easier to use than something like TurboTax which is constantly trying to sneak in an upsell or some additional charge.
Edited to add - given how low your income was, check with some local colleges or universities. There is a federally sponsored program called Volunteer Income Tax Assistance (VITA) that gives accounting students the opportunity to learn by helping people file their taxes, and an accounting professor is always available for questions and reviews all returns before they are filed. This service is free, and everyone I know that has used it has been very happy with their experience.
This, along with making quarterly estimated income tax payments to the IRS, was the most important thing I learned about when I started working as a freelancer a decade ago.
@Reply: if you look at one of your older paystubs, from when you were working for a company, you’ll see a line item that’s titled “FICA”: that’s the amount that’s deducted from each of your paychecks to pay into the Social Security and Medicare funds.
What isn’t necessarily visible to you as an employee is that your employer is required to match that FICA payment themselves, when they send your FICA payment (along with the payment from your fellow employees) to the Federal government. So, if your FICA tax (deducted from your paycheck) is, say, $50, when your employer submits your FICA payment for that pay period to the Feds, they are actually submitting $100 on your behalf ($50 from you, $50 from them).
When you’re self-employed, you’re not only responsible for directly paying the IRS for your income tax, but you’re also responsible for making sure that you’re paying your FICA tax. And, you’re responsible for paying the “employer match” on FICA – that’s the “self-employment tax.” In essence, you have to pay twice the FICA that you would pay as an employee.
Penalty it is, then!
