If you're going down the self-employed or entrepreneurial path, you need talent, enthusiasm, and drive. But to be successful, you also need to tackle the financial basics of self employment. To make them easier to remember, we’ve come up with a highly scientific methodology called TACO. It stands for both deliciousness and the following:
Taxes / Accounting / Covering your risks
Tax tips for the self-employed
Let’s answer the most common question first: do you have to pay taxes at all?
The IRS says you must include any extra income when you file your taxes, even if it’s only $25 and comes from a side job. But it’s a little trickier when it comes to determining whether you owe the additional self-employment tax. If you made at least $400 after subtracting any business expenses, (a) congratulations and (b) you’ll have to pay this second tax.
When you’re starting out, you may be tempted to ignore this because it looks complicated, but don’t! Taxes may not be exciting, but if you stay on top of them you’ll actually save money over the long run by avoiding late fees and other penalties.
Unless you’re an experienced tax preparer we recommend hiring an expert. They’ll know all the special rules and deductions that apply to your situation, and they’ll usually save you more money than they cost. You’ll also sleep better knowing that your return isn’t rife with errors that might trigger unwanted attention from the IRS.
There's a lot of ground to cover on taxes, so we’ve put together an overview on self-employment taxes that gives you a good roadmap to start.
Accounting (and accountability) for the self-employed
The best way to make your taxes less annoying is to practice good accounting throughout the year. That means saving every receipt and writing down every expense as it happens, not three weeks from now, because you think you’ll remember to do it later but trust us, you’ll forget.
If you’re not sure whether it counts as an expense, record it anyway and let your tax preparer make the call.
You should also keep a record of every bit of income you make over the year, so that you’ll know your total earnings without having to wait for tax forms or going through 12 months of bank statements.
Accountability is another good habit to build. When you’re self-employed, you don’t have a group of coworkers to look to for business advice. One cheap workaround for this is to use a "decision book." Take a plain notebook and record the details of every business decision you make, then go back regularly and compare what actually happened to what you thought would happen. This not only helps protect you from hindsight bias, but also gives you insight into what influences your decisions.
Covering Your Risks
Finally, let’s talk about covering your risks, by which we mean something—for example a lawsuit, a fire, or a chronic health condition—that puts your career or your assets in jeopardy.
There’s no way to completely remove all risks, but there are two proven ways to protect yourself from them. The first is to "self-insure," meaning build an emergency fund. The second is to buy insurance designed to cover specific risks, for example renters insurance or disability insurance. We’ll talk about ways to implement both of these strategies in later posts.
Entrepreneurs have a third strategy as well, and that’s to convert your business into an LLC (a limited liability corporation). State laws differ in how much protection this can offer when only one person owns an LLC, so you should seek legal advice if you want to go down this path.
Taxes, Accounting, and Covering your risks: those are the financial basics of self employment, and once you’ve got them down you can add whatever toppings you like to make the perfect career. Feel free to jump in below and share your own experiences with TACO. (Or with actual tacos—we enjoy those too.) Do you already use something like a decision book to hold yourself accountable? Do you have an emergency fund or supplemental insurance? What’s your strategy for tracking expenses and income, or for making tax filing less burdensome? We look forward to reading what you have to share!