A $9,000 IRS penalty after 5 years of self-employment — the tax mistakes that could cost you big

Being your ain brag tin beryllium incredibly rewarding. But it besides comes with a batch of responsibility, and erstwhile thing goes wrong, there's lone the brag — that's you! — to blame.

One facet of self-employment that tin travel you up is doing your taxes. If you're caller to self-employment, you whitethorn privation to prevention wealth by doing your ain taxes. But making a mistake erstwhile it comes to your filing tin outgo you — successful immoderate cases, a batch much than utilizing a nonrecreational taxation preparer mightiness have.

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Here are immoderate of the biggest taxation pitfalls for self-employed people, and however to debar them.

Estimated taxes

Imagine Jess, who made the leap into self-employment 5 years agone arsenic a freelance photographer. She's been doing her taxes herself, utilizing taxation software, but she wasn't alert that, arsenic a self-employed person, she was required to wage estimated taxes quarterly.

Now, she's gotten a measure with a $9,000 punishment from the IRS.

It's a immense hit, and erstwhile Jess talked to a taxation professional, she realized she was besides missing retired connected deductions she could person made for her concern and mounting up a SEP IRA.

According to the IRS, 1 of the communal mistakes that tiny concern owners marque erstwhile it comes to taxes is underpaying estimated taxes (1).

If you're self-employed, you typically person to wage quarterly estimated taxes. Estimated taxes person to beryllium paid passim the year, successful the aforesaid mode that an leader withholds taxes from employees' paychecks and remits them to the IRS (2).

Estimated taxes wage your income taxation and different types of taxes specified arsenic self-employment (SE) tax, which "is akin to the Social Security and Medicare taxes withheld from the wage of astir wage earners," the IRS says (3).

Like the imagined script of lensman Jess, if you don't wage capable successful your estimated payments, you could look a penalty.

"Generally, astir taxpayers volition debar this punishment if they beryllium little than $1,000 successful taxation aft subtracting their withholdings and credits, oregon if they paid astatine slightest 90% of the taxation for the existent year, oregon 100% of the taxation shown connected the instrumentality for the anterior year, whichever is smaller," according to the IRS (2).

You'll besides look penalties for precocious quarterly payments, adjacent if you get a refund connected your taxation instrumentality (2).