About United Way
United Way brings people together to build strong communities where everyone thrives.
As one of the world's largest privately funded charities, we serve 95% of U.S. communities and 37 countries and territories; our humanitarian aid supports 48 million people every year. Through United Way, communities tackle tough challenges and work with private, public, and nonprofit partners to boost education, economic solutions, and health resources.
United Way is the mission of choice for 1.5 million volunteers, 6.8 million donors, and 45,000 corporate partners in more than 1,100 communities worldwide. Together, we are building resilient, equitable communities across the globe. Learn more at UnitedWay.org. Follow us: @UnitedWay and #LiveUnited.
About MyFreeTaxes®
MyFreeTaxes helps people file their federal and state taxes for free while getting the assistance they need. United Way provides MyFreeTaxes in partnership with the IRS’s Volunteer Income Tax Assistance (VITA) program to help filers prepare their tax returns on their own or have their return prepared for them for free.
For millions of Americans, tax refunds and credits are essential to their financial stability and success. These credits maximize filers’ refunds and provide important opportunities for individuals and families to build financial stability. For many households, their tax refund may be the biggest check they receive all year. For entrepreneurs, filing taxes can make or break their financial bottom line.
Since 2009, MyFreeTaxes has helped more than 1.3 million people file their taxes for free while claiming over $1 billion in refunds and saving over $260 million in filing fees.
About Civitas Strategies
Founded in 2009 by Gary Romano, Civitas Strategies, is a management consultancy focused on increasing the impact of mission-driven organizations, both for-profits and nonprofits. The pandemic of 2020 uncovered countless crippling vulnerabilities for small businesses. As a result, we shifted our work to focus more intensively on the business basics required for small businesses to survive and thrive. Our work across the country since then includes business coaching, technical assistance, and grant administration support to small business owners which includes sole proprietors and corporations.
Introduction
Small business and self-employment play a critical role in our economy, generating income and wealth that supports the financial needs of entrepreneurs, employees, and their families. However, the costs and stress associated with filing business-related taxes limit the positive financial impacts of self-employment for many entrepreneurs.
In 2021, the gig economy included over 59 million workers in the US. The gig economy includes a variety of independent contractors, typically taking on short-term assignments such as Lyft or Uber drivers, DoorDash and other food app delivery drivers, Instacart workers, promoters, brand ambassadors, graphic designers, freelance writers, and more. Often, gig economy entrepreneurs have other full or part-time “regular” jobs where they work as employees, but increasing numbers are making their self-employment gigs their only jobs.
United Way created this guide to help more self-employed people, including small business owners engaged in the gig economy, easily and accurately file their taxes for free. Designed for both full-time and part-time entrepreneurs, this guide takes you through the steps of getting ready to self-prepare your taxes using online software.
This guide has two parts.
Part I: Getting Ready for Tax Season focuses on what you need to know about taxes and how to prepare for tax season.
Part II: Filing Your Return Online offers step-by-step instructions on how to use MyFreeTaxes to complete your return online.
This guide will help you take each step in your tax-filing journey. The layout is in a simple question-and-answer format based on questions frequently posed by other entrepreneurs. To answer the questions, we drew upon official U.S. Internal Revenue Service guidance as well as other nationally recognized sources.
Not including all your income on your taxes — such as leaving out a 1099 you received from one side job even though you reported the income from your “day job.”
Taking off too many expenses or ones that are high — like claiming $40,000 in cell phone expenses but your business doesn’t require high phone usage but your business doesn’t require high phone usage.
Taking a very large loss on your business or having losses year after year — businesses will take a loss from time to time (we’ll review that later), but you want to avoid having losses that are far more than what you earned. After all, if your business regularly loses more money than it earns, the IRS may be curious about why you continue to operate it!
Not reporting payments from apps such as Zelle, Cash App, or Venmo.
Claiming 100% use of your vehicle. Some of you may have a van or car you use for your business — that’s allowed. However, reporting that the vehicle is only used for work (and never for personal reasons) can draw attention since it is less common.
As you can see, many red flags can be easily avoided through proper understanding of and preparation for your taxes.
PRO TIP Keeping good records throughout the year will make tax preparation easier.
How to File Your Taxes for Free
MyFreeTaxes helps people file their federal and state taxes for free while getting the assistance they need. United Way provides MyFreeTaxes in partnership with the IRS’s Volunteer Income Tax Assistance (VITA) program and is designed to help filers prepare their tax returns on their own or have their return prepared for them for free.
Why Care About Your Taxes?
Taxes are an important consideration for any business. Through taxes, we all contribute to our government at the national, state, and local levels. Paying taxes and following IRS regulations is important. It’s also important to take advantage of all the deductions and tax credits for which you are eligible. This will reduce your taxes, maximize your profit, and allow you to continue investing in your business.
Effective tax preparation can also head off the long-term cost of an audit. Though only a relatively few people are audited every year, if you are audited, the cost in time and money can be great.
The best way to avoid an audit is to keep in mind common “red flags,” or issues that often lead to an audit. The most common red flags for sole proprietors are:
MyFreeTaxes Self-Employed Tax Guide
for Small Business Owners
How does it work?
It’s easy! Head to MyFreeTaxes.com to get started. Once there, use our quick and easy tool to indicate whether you prefer to prepare your own taxes online or want to have your taxes prepared for you. After you tell us how you want to file, we’ll ask a few simple questions and connect you to the free tax filing options for which you are eligible.
Over 70% of people are eligible for IRS-sponsored free tax filing services such as the Volunteer Income Tax Assistance (VITA) program, so there’s a good chance you qualify. In the off chance that you’re not eligible for free tax filing through VITA, we’ll connect you to alternative free tax filing options so you can still file for free.
Have questions or need support while using one of the tax filing options we recommend? Visit the MyFreeTaxes Support page to receive assistance from IRS-certified tax specialists via phone, email, or live chat, or refer to our FAQs and filing guides.
What is the IRS VITA program?
For over 50 years, the IRS Volunteer Income Tax Assistance (VITA) program has provided free tax preparation services to qualifying individuals. In 2021, tens of thousands of VITA volunteers at 2,800 VITA sites across the nation prepared nearly one million returns for eligible filers and generated $1.7 billion in refunds.
Most VITA sites provide services in person, but United Way’s MyFreeTaxes program provides VITA services virtually, enabling you to file your taxes for free from the convenience of your laptop, smartphone, or other digital device.
Part II: Filing Your Return Online
Part II: Table of Contents
Video: Filing Your Return Online
Why Tax Prep Software is a Good Idea for Small Business Owners & Self-Employed Entrepreneurs
How to File Your Taxes for Free
Begin Completing Your Schedule C
Enter Your Self-Employed Income
Enter Your Schedule C Business Expenses
Enter Business Car and Truck Expenses
Enter Business Assets Subject to Depreciation
Enter Your Business Use of Home Expenses
Qualified Business Income (QBI) Deduction
Why Tax Prep Software is a Good Idea for Small Business Owners & Self-Employed Entrepreneurs
Many self-employed business owners can prepare their own taxes. Using tax software is a great way to save yourself time and money. It also can give you peace of mind, since many calculations are performed for you and there are automated cross-checks to ensure you are properly accounting for your revenue and expenses. According to the IRS, filing electronically helps you avoid common and costly errors. Best of all, it puts you in the driver’s seat of this essential business responsibility - filing your annual tax return.
Q: How do I know if I am self-employed?
A: If your business is taxed as a sole proprietorship, you are self-employed. You will file a Schedule C to report your business revenue and expenses and pay a self-employment tax of 15.3% on your business profit, after deductions.
How to File Your Taxes for Free
MyFreeTaxes helps people file their federal and state taxes for free, including free access to online preparation software to complete and submit your return. This guide focuses on TaxSlayer® because most of our users file using this software.
How to Use this Guide
You may feel a bit intimidated by the idea of doing your own taxes for your business, but this guide will help you have a hassle-free experience that can save you money, minimize the risk of audit, and help you set goals to improve your business practices for many years to come. You’ll come out of tax season more confident about your return and your understanding of it.
This guide builds on the MyFreeTaxes Self-Employed Tax Guide: For Gig Economy Entrepreneurs (Part 1: Getting Ready for Tax Season) and is intended for self-employed people. While there are many examples of gig economy entrepreneurs, here is a short list of who that may include:
Rideshare drivers
Food app drivers
Instacart shoppers
Airbnb host
Freelance professional services marketplace worker
Freelance writer
Babysitter
Pet sitter or dog walker
Cleaner
Brand ambassador
Graphic designer
It’s best to use this guide as a reference while you’re preparing for and completing your tax return. The goal of this guide is to help you to accurately report your business revenue and expenses while claiming important deductions. This guide is primarily focused on helping you complete your Schedule C, which is the portion of your tax return where you report your business income and expenses. If you need assistance with other parts of your tax return, you can access assistance at MyFreeTaxes.com/Support.
The roadmap below lists the steps in your journey to file self-employed taxes using MyFreeTaxes. Look for this roadmap throughout the guide to chart your progress.
Access MyFreeTaxes.com
When you access MyFreeTaxes, you will be asked to choose how you want to file your taxes.
You may choose “File My Own Taxes” or “Have My Taxes Prepared for Me”. For this guide, we used the “File My Own Taxes” option because many small business owners are not eligible for the “Have My Taxes Prepared for Me” option.
Gather your documentation
Once you log into the tax software, you will need to enter basic demographic information about yourself (and your spouse and dependents, if you have any):
Name
Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
Date of birth
Marital status
Dependents
Address
Other information to help determine your personal tax credits, including if you are a U.S. citizen; were a student last year; can be claimed as a dependent on another person’s taxes, or have any dependents to claim on your taxes.
Other information to help determine your personal tax credits and liabilities.
Next, to help prepare your business taxes with ease, you want to be sure that you have your revenue and expense records up-to-date and handy. Perhaps you have an accounting system where this data can be pulled, or you have a recordkeeping system with this information. You will generally need:
1099 forms
Bank and credit card records
Canceled checks
Receipts that show what customers paid you
Paid receipts or invoices for goods or services that you purchased for your business
Payroll records, if applicable
Mileage records documenting the business use of your vehicle
Business Use of Home percentage calculation if you use parts of your home for your business
Having these records will help you determine what tax forms you will need.
Indicate all forms of Income
After entering basic demographics about yourself, you will be prompted to enter your forms of income. We recommend that you choose the “I want to be guided” option so you can be taken through a simple questionnaire to determine if any of the forms listed below apply to your tax situation.
Alternatively, if you choose “Select my Forms”, you will then be shown a list of various income types and the associated tax forms. If you have one of these forms, you will click BEGIN to be guided through entering the information from that form into the tax prep system.
In order to be directed to complete the Schedule C, you must answer “yes” to this question:
You will then need to begin inputting the revenue for your business(es). If you have more than one distinct business or gig, you will enter a separate Schedule C for each of them. To determine if your gigs can be entered on the same Schedule C or a separate one, think about the type of work that is being performed for them. If it’s similar or related work, those services can be treated as one Schedule C, if they are not related, they will need to be separated. For example, if you drive for both Uber and Lyft, you can enter your revenue and expenses on one Schedule C because those are both part of your driving services gig.
Your revenue should include all the money you took in for your business from all sources, even if you are not issued a 1099. This should include cash and money from cash or payment transfer apps used for your business.
Profit or Loss from Business. This is how you will report self-employed income. This will create your Schedule C. Remember that your income includes cash and checks received from customers and clients. The bulk of your business revenue and expenses will be included here. Later in this guide, we cover this form in detail and guide you step-by-step.
1099-NEC. Here you will enter details from the 1099-NECs that you received. That stands for nonemployee compensation. Likely you will receive a 1099-NEC for business-related payments over $600 in which you were contracted to do a certain job. For instance, if you performed a catering job, and you were issued a 1099-NEC, you would include those here. This will also include grants and awards, if you happened to receive any.
The software uses the same labels that you will see on a 1099-NEC that was issued to you. You will just need to enter the information from your form into the system.
Payer – the company that paid you
Recipient – your business information
TIN – tax ID number (such as an EIN)
1099-K. If you accepted $600 or more in business payments through a third-party payment processor like Square, Venmo, or Cash App you should receive a 1099-K. You will also receive this form if you received $600 or more in payments from rideshare companies and other companies that you work through and that issue payments to you like Etsy and Turo. This form covers any self-employed income you received through this payment processor for the tax year. If you worked for multiple app companies or used multiple apps to process customer payments, you will receive multiple 1099-Ks.
Because 1099-K payments are only issued for business transactions, the system will prompt you to enter your 1099-K income when you are completing your Schedule C. So, keep your 1099-K(s) handy, because you will enter that income as part of your gross receipts on the Schedule C – Income page.
PRO TIP See MyFreeTaxes Self-Employed Tax Guide, Part I: Getting Ready for Tax Season for some helpful worksheets that you can use to organize your income so that you can readily enter it into the tax filing software. These worksheets can also keep your taxes organized.
The system also lists Less Common Income as an option. This usually will not be applicable to your business earnings as it is referring to prizes or awards. Be sure to list any grants that you received as Form 1099-NEC income and not less common income. Doing that will be sure that it is taxed correctly as your self-employed income.
Begin Completing your Schedule C
Now, it’s time for you to begin to enter the remainder of your gross income and business expenses for your Schedule C.
We recommend that you choose the “Guide Me” option so that you can be guided through the completion of your Schedule C.
First, you will be directed to enter basic information on your business such as the name, tax ID (such as your Employer Identification Number – EIN, if you have one), address, and business type.
If you don’t have an EIN, consider getting one for privacy reasons. But you can only use a newly issued EIN if it was created within the tax year of your return. If you created an EIN on January 15, 2023, you could not use it for your 2022 tax return. Once your EIN is created, you will keep the same one to file annually.
If you do not know the code for your business, you can click the “Business Code” link and enter keywords for your business and select the closest match from the list.
Next, you will see questions about your business. The first question is your accounting method. This is a required entry on tax filings. Businesses must state if they use the Cash or Accrual accounting method. The Cash Method is the most common accounting method for gig workers. This means that your transactions are accounted for at the time you receive a payment or when you pay an expense. You can opt to select the accrual or another method if it applies but it is uncommon for many sole-proprietors.
You’ll then need to select a closing inventory method which is how you value sellable inventory remaining at the end of an accounting period. Cost refers to the purchase cost of inventory, and market value refers to the replacement cost of inventory. This only applies to those who hold inventory, if this is not applicable to your business, you will select “Not Applicable”.
Next, you’ll check the box if you “materially participated” in the operation of your business during the tax year. This answer will usually be “yes”.
Then, you will check off any remaining boxes that apply to your business.
For instance, if you made any payments in the tax year that would require you to file Form(s) 1099, you would check the box to indicate that. If you issued a 1099 to someone that you contracted to perform a service, like cleaning, or a consultant, and you paid them more than $600, you will check the box.
Note – In some cases, sole-proprietors issue 1099s to employees or helpers. If you issued any 1099s, enter them as contract labor.
Be mindful that you are classifying your employees properly. Typically, if you direct how someone works, they are an employee. For more information on classifying staff, see Resource 3: Payroll Taxes (for businesses with employees) in Part 1 of this guide.
Note that if you log out and later log back in, you will see the below Schedule C menu options. There, you can move through the menu on your own, or you can choose Restart Schedule C Guide and you will be guided through the completion of your Schedule C.
Enter your self-employed income
Now, back to preparing your filing using the MyFreeTaxes Schedule C guide! You will be directed to enter your business’s income. This will be your gross income, so you will need to add up all your cash receipts, 1099 forms, and any other payments that you received. If you entered your self-employed income in the revenue worksheet provided in Part 1 of this guide, you can just enter that total or if you have an accounting system, you can get that total from there.
After entering your business income, you will move on to the Cost of Goods Sold (COGS) guide. Costs of goods sold are ones that are used in the creation of something you sell, which is why this is also known as the “cost of sales.” For example, if you had a crafts business, this could include fabric, thread, and similar items. COGS is considered a business expense and does not count toward your gross revenue. This can be a common entry for some businesses but for others it can be a red flag, so be sure to only use it if your work involves manufacturing, reselling, or repackaging products for sale.
If you do create a product by combining materials, you will want to include cost of goods sold.
Some common COGS are:
The cost of materials, including the shipping to your business (but not to customers)
Inventory for resale
Packaging and re-packaging
Labor in producing goods
Utilities and rent associated with a manufacturing location
There are many businesses that use COGS. Some examples of businesses who should use COGS include:
A business owner preparing artisanal foods for a local grocery store
A crafter selling products on Etsy
A business owner buying products on Ali Baba and reselling them on eBay
A CBD store owner re-packaging products for sale in their store
An entrepreneur scoring deals at a local thrift store to sell online
A mechanic keeping parts for repairs
A construction business owner with nails, wood, and flooring in storage
A pizza shop owner purchasing ingredients to make and package food
If any of these scenarios are like yours, you will likely use COGS.
If you do report COGS, you need to fill out all the lines seen on the following screenshot. A common mistake that Schedule C filers make is only filling out part of this screen (which can be a red flag).
So how will you do it?
Inventory is the inventory which is the cash value of products you had on hand at the start of the year.
Purchases are the amount of all purchases for raw materials and merchandise for resale that were made by the business during the tax year. This generally refers to pre-made items that you do not have to do much to get the final product ready to be sold. This amount should not include any amount for purchases or products that were consumed by any owner of the business for personal consumption.
Labor is the wages that are paid to employees who spend their time working directly on the product being manufactured (or mined) for sale. So, these labor costs must be directly tied to production.
Materials and supplies are the costs of all parts, raw materials, and items used to build, create or resell a product.
Other costs are items such as shipping from a producer to you, or the costs of a manufacturing location.
And finally, the inventory you had at the end of the year is the amount of all finished or partly finished goods, raw materials and/or supplies acquired for sale or physically part of the merchandise intended for sale at the end of the tax year.
For example, Jessica has a crafting business. She started the year with $500 in materials, so she puts this under inventory at the beginning of the year. She paid a friend $350 to help her process a surge in orders over the holidays, so that goes under labor. Throughout the year she purchased $800 in new materials and enters that in materials. She also had to pay $275 for packaging, so she puts that under “other”. After all her sales, she only had $130 in materials left, so she enters that as her ending inventory.
Enter your Schedule C business expenses
Next, you will be prompted to enter your business expenses, based on specific categories. These categories align with allowable business deductions that will be entered on your Schedule C.
As you see, the categories are displayed and very few have explanations of what expenses would count within each category. We will use the worksheet below to review these expense categories in the order they are displayed. You can use this worksheet to practice entering your expenses before inputting them into the software.
A Note for those with Home Office Expense and Business Use of the Home Deductions
While it is uncommon for gig economy entrepreneurs, depending on the gig, you may have a home office. Business Use of Home is one of the last expense entries as you are guided through the expense questionnaire. PLEASE NOTE: Some of the expenses that you are first prompted to enter will need to be entered as Business Use of Home Expense, subject to your Business Use of Home Percentage, and not put in an expense category unless it is a 100% business expense, and not shared with personal use.
| Category | Description | Total Expenses ($) |
|---|---|---|
| Advertising | Here you’ll enter costs to promote your business including online and print ads, brochures, mailers, flyers, business cards, and website costs. |
|
| Contract labor | The system asks if you made any payments that required you to issue a Form 1099. If you issued a 1099 to someone that you contracted to perform a service, like cleaning or a renovation, and you paid them more than $600, you will enter the amount paid. This is an uncommon expense for the gig economy. | |
| Commission and Fees |
This line is intended for payments made for referrals or sales commissions that are occasional or limited. It is very common for business owners who get paid through an app or larger businesses that take a commission, such as Etsy, eBay, or Uber, to have commission fees to deduct. |
|
| Depletion | Typically, depletion is the use of a natural resource during your business, such as mining or drilling. It is not typically applicable to the gig economy. |
|
| Employee Benefit Programs |
This is for businesses. with employees that offer benefits. This is uncommon for gig economy entrepreneurs. | |
| Health Insurance |
Here you will enter the total amount of health insurance premiums you paid for yourself, your spouse, and your dependents (under age 27) in 2022. This includes Medicare premiums that you voluntarily pay. You can deduct up to 100% of health insurance premiums for you, your spouse, and your dependents if you're self-employed and have a net profit from your self-employment. This is only for qualifying private health insurance plans, not those sponsored by an employer. For example, you cannot include any premiums that are paid through a spouse's health insurance benefits through their employer. Further, if you or your spouse were eligible to participate (even if you declined coverage) in an employer's health plan at any time during a given month, you cannot take the deduction for that month. For example, if your spouse’s job offers health insurance and you decline it, but paid into your own plan, you cannot take this deduction. The deduction may be limited if the business has low net earnings. You cannot deduct more in premium payments than your net profit made from self-employment. This means that you may not be able to deduct 100% of your premiums. This entry should be reduced by any reimbursements received. For example, if you have a monthly insurance premium cost of $1,500 and $500 is paid through a company health reimbursement arrangement, you can only deduct $1,000. These deductions are figured as part of your Form 1040 as an adjustment to your income, not as part of Schedule C. However, because this deduction is for the self-employed, you are prompted to enter it as part of the Schedule C questions in the software. |
|
| Insurance | This is for insurance other than health. Include your general liability insurance, renter’s, fire/theft/flood, and worker’s compensation insurance if you have employees. |
|
| Long-term Care Insurance |
Long-term care benefits include both payments made under a long-term care insurance contract as well as accelerated death benefits. If you paid into a plan for yourself, spouse or dependents, the premium may be tax deductible. |
|
| Mortgage Interest |
This line is for interest related to a loan that is exclusively for your business (and not one shared with your personal finances, such as a home mortgage). This is uncommon for the gig economy. |
|
| Other Interest |
This includes interest you paid directly related to your business for credit cards and loans. Deductible interest can include interest on business credit cards (not personal ones) and business loans such as the Economic Injury Disaster Loan or an SBA 7a loan. |
|
| Legal and Professional Services |
Include any fees you paid to a lawyer, accountant, or tax preparer, for business use only, as well as membership fees for professional memberships like the Chamber of Commerce or other associations. |
|
| Office Expense |
Here’s where you want to include amounts paid for office expenses, including supplies (such as ink, toner, paper, staples, writing utensils, office furnishings, etc.) and postage, as well as your business communication service costs (such as cell phone service, internet service, second phone line, fax, and video conferencing services). |
|
| Pension and Profit Sharing |
These are contributions to your employees' retirement accounts, not your own. Costs include SEP IRAs and SIMPLE IRAs. This is rare for the gig economy. |
|
| Rent or Lease of Equipment |
This only applies to the rental of business equipment such as copiers, office furniture, computers, printers, etc. This does not apply to rental cars. |
|
| Rent or Lease of Property |
This is rent paid for property used for work only, not for an office in your home. For example, renting a storefront. | |
| Repairs and maintenance |
This includes any repairs and maintenance of the space your use or your equipment. Repairs and maintenance are required for you to conserve or maintain your property – these are repairs that do not add value to the property. This is an uncommon expense for the gig economy. |
|
| Supplies | Supplies include both every day and one-off items you use in the operation of your business.This can include waters for your customers, courier bags, etc. |
|
| Taxes and Licenses |
You can enter taxes (and local taxes, excluding federal taxes) and business license fees here. These should only be taxes and fees that are 100% related to your business. |
|
| Travel | If you traveled for work or paid for business travel expenses for your staff, you will include those costs here. This does not include expenses for mileage or local meals but rather if you had to travel for a conference, training, or business meeting. Include costs like airfare, hotels, rental cars, taxis, ride-share services, and baggage fees. |
|
| Meals (50%) | This is for business meals that were not purchased at a restaurant (e.g. – grocery store or convenience store). For example, if you were having a business meeting or away on business travel and purchased a sandwich from 7-11. |
|
| Meals (80%) | This is only applicable to certain transportation workers. If you are subject to the Department of Transportation (DOT) hours of service limits, the allowable deductible percentage is 80% for business meals while away from home. Those who this applies to would be property or passenger-carrying drivers such as a tractor trailer or Greyhound bus driver that require you to be away from home overnight. |
|
| Meals (100%) | This is for business meals purchased at a restaurant for immediate consumption. For example, if you were having a business meeting or away on business travel and purchased lunch from a restaurant. For tax years 2021 and 2022, your business meals are 100% deductible if food and beverages were purchased from a restaurant. |
|
| Utilities | This applies to you if you have an office or other business property that's not part of your home. This includes utilities such as gas, electricity, internet, or water. This also includes trash collection, pest control service, and security alarm monitoring service. This is uncommon for the gig economy. |
|
| Wages (less employment credits) |
This is only for those with employees. Make sure that the wages you enter are only for W-2 employees reported to the government. As a sole proprietor, you cannot pay yourself as an employee. You can take money out of the business, but your “pay” is considered the amount on Line 31 (your net profit or loss) so there’s no need to enter money you took out for yourself throughout the year here. | |
Enter Business Car and Truck Expenses
The next step will be entering your Business Car and Truck Expenses.
When tracking your mileage make sure you keep track of the day, purpose, and total miles because you will need to enter that information for this deduction. If you use a driving app for work, you can likely pull a report of your trips with mileage. However, your log can be something as simple as:
June 9 – 3.25 miles going to Walmart for supplies
PRO TIP The IRS standard mileage rate was $0.56 per mile from January 1, 2022, to June 30, 2022, and then increased to $0.585 (that is 58.5 cents) per mile through December 31, 2022, due to increased fuel prices. In addition to those standard miles, you can claim the business portion of car loan interest, parking fees, and tolls paid. However, if you use standard mileage, you cannot deduct other costs associated with your car, including gas, repairs/maintenance, insurance, depreciation, license fees, tires, car washes, lease payments, towing charges, auto club dues, etc.
Next, you will need to determine if you are using the standard mileage deduction or actual expenses to claim your business vehicle expenses. The system will guide you to the appropriate method based on whether you own or lease the vehicle and the methods that you previously used in past tax years.
In general, standard mileage is better if you drove a lot of miles. This will get you the miles driven multiplied by the IRS mileage reimbursement rate.
Actual expenses might get you a bigger tax break if you had higher repair, gas, and insurance expenses for the year. With actual expenses, you need to keep track of all payments associated with the business use of the vehicle, including car loan payments.
Standard Mileage
If you are using standard mileage to determine your vehicle deduction, you will enter it under Car and Truck Expenses.
In order to calculate standard mileage, you must enter the business miles that were driven during the tax year. Be sure to have documentation of the business miles driven for your records and in the event you are audited. The system will apply the standard mileage rate to your business miles driven to calculate your deduction.
While it may be convenient for you to pull ride reports from apps your drove for, it’s important for you to keep track of your miles driven for your own records because you can deduct all business miles driven, not just those miles counted for active miles. For instance, if you needed to travel 5 miles to get to your first passenger, those 5 miles are deductible however they may not be factored into the ride report in the app.
Remember, you can also claim the business portion of car loan interest, parking fees, and tolls. To claim those expenses, you will enter them as Other Expenses once you get to that screen.
As noted on the screen shot above, if you are using Actual Car or Truck Expenses, you will enter those expenses under Depreciation which follows this section.
Next, you will be guided through reporting depreciation of your business assets.
Enter business assets subject to depreciation
Depreciation can be an intimidating subject but is a critical part of your business tax planning. Depreciation is the practice of deducting a large business cost over time rather than in just one year. This is usually a requirement when you want to deduct certain large purchases (over $2,500) or an improvement. You can also depreciate your home if you own your home and use a portion of your home for business.
You may be curious about what is classified as an improvement. An improvement differs from a repair because it is not meant to get something back into working condition, instead, it improves or adds value. An example of an improvement would be the installation of a new fence or adding a new roof. Another example might be improvements to a vehicle used for business purposes, such as a new paint job on a car that you use for a ride share service.
We will guide you through the rest of the Business Depreciation screens. For a better understanding of depreciation, view What is depreciation?
When you select “Assets”, you will enter the following information on each of your business assets individually:
Note that if you’re depreciating an asset associated with your home, you must also use the percentage of business use according to your Business Use of Home calculation (this is the percentage of square feet used for your business divided by the total square footage of your home). If the asset is used exclusively for business, and has no personal use associated with it, you can enter your percentage of business use as 100%.
Even though you may opt to depreciate an item using Section 179, you’re still required to choose a depreciation method from the drop down list shown here.
You will then indicate if the property is a listed property. A listed property is one that is allowable to use for both business and personal purposes.
Typically, you will only select the listed property option if it is a vehicle that you are depreciating.
Listed Property Definitions
Auto – small vehicle weighing 6,000 pounds or less
Electric Auto – electric vehicle weighing 6,000 pounds or less
Truck (placed in service after 2002) - a vehicle such as a pickup truck
Truck (No Limits) – a vehicle such as a pickup truck
Heavy SUV – larger vehicle exceeding 6,000 pounds, such as a van
Not Listed (Vehicle) – an eligible vehicle that does not fit the other descriptions
Entering Actual Car or Truck Expenses
If you are claiming actual business car or truck expenses (not using standard mileage) you will be able to depreciate your vehicle and claim your actual expenses under the Depreciation screen.
You will need to enter some information about the vehicle, such as the date it was placed in service (the first time you used it for business purposes), the original cost and the percentage of business use. Unless you have a dedicated vehicle used only for business and not at all for personal use, this figure will not be 100%. A simple way to calculate your percentage of business use is to track your total miles driven and the total business miles. You will divide your business miles driven by your total miles to get the percentage of business use.
For example, if you drove your vehicle a total of 12,000 miles during the year and 4,800 miles were for business use, your business use percentage would be 4800/12000 = 0.4. You will multiply 0.4 x 100 to get 40%.
You will then input the amount, if any, of Section 179 deduction that you will take on the vehicle and then indicate if you claimed any special depreciation on your vehicle in a prior year. These are both faster ways to depreciate eligible expenses. For a better understanding of these depreciation topics, view What is depreciation?
Under Listed Property Information, you will select the type of vehicle that you are depreciating:
Listed Property Definitions
Auto – small vehicle weighing 6,000 pounds or less
Electric Auto – electric vehicle weighing 6,000 pounds or less
Truck (placed in service after 2002) - a vehicle such as a pickup truck
Truck (No Limits) – a vehicle such as a pickup truck
Heavy SUV – larger vehicle exceeding 6,000 pounds, such as a van
Not Listed (Vehicle) – an eligible vehicle that does not fit the other descriptions
After you select the vehicle type, you will be prompted to enter your actual expenses. Actual car expenses include the following:
Licenses
Lease payments
Registration Fees (not plates)
Gas
Insurance
Repairs
Oil
Garage Rent
Tires
Tolls
Parking Fees
You will total up all of your relevant receipts and enter your total car expenses in the “Actual Expenses” box.
Once you’ve entered all your business assets, you will move to the Depreciation Questions. Answer each question that applies by checking the corresponding box.
Check the boxes if they apply to your situation. Note that the Business Income Limitation will be pre-populated with $1,050,000 which is the maximum Section 179 expense deduction allowed. Most self-employed businesses will not exceed that figure.
Enter your “other expenses”
Next, you will be guided through your Other Business Expenses.
You will be able to enter other business expenses that did not fall into the previous expense categories listed. You will enter these expenses, by category, one at a time.
This section covers anything else that is deductible but not listed elsewhere. The most common will be:
Cleaning services
Software or apps that cost more than $200 (otherwise they can be listed as an office expense)
Accessibility and financing expenses such as online service fees, bank and merchant fees, and credit card processing fees.
Parking, tolls & registration fees (for those who chose to use standard mileage)
For example, if you paid $500 for janitorial services over the year, you would enter that as:
PRO TIP (TaxSlayer specific) If you took the standard mileage deduction for your business vehicle, you would enter other allowable car expenses such as parking, tolls and registration fees here as Other Expenses.
Enter your business use of home expenses
Keep in mind that you can deduct space in your home used exclusively for your business. This can include a home office, even if it is just part of a larger room or a storage area where you keep supplies for your business.
Sole proprietors may use part of their home in their business. For example, if you are a virtual assistant, you may have a home office. You can also count space used for the storage of inventory or product samples.
The first and most important thing to consider is if the space in your home is exclusively used for business. That means that it is only used for your business. If the space is partially used for business and partially for personal purposes, it won’t qualify.
The IRS provides two options for deducting the business use of your home:
You can use the Regular Method which accounts for all the actual expenses associated with your home and determines the deductible portion by applying your business use of home percentage; or
You can take a Simplified Method where the deduction is based on a set rate from the IRS if you are using 300 square feet or less of space. This method will allow a maximum deduction of $1500.
PRO TIP As a rule of thumb “regular use” means you use the space two or more times per week.
More on this topic is covered in detail under “How do I include the Costs of my Home?” in MyFreeTaxes Self-Employed Tax Guide: For Gig Economy Entrepreneurs.
To prepare for claiming these deductions on your return, whether you rent or own your home, there are two steps you need to take: 1) determining the space used for duties related to your business and 2) determining the allowable expenses related to your business use of your home.
You will first need to indicate if your home was used for child care. Unless you are a child care business, this will not apply to you. Next, a simple calculation will be performed to understand what percentage of your home is used for business. To get this, you will need to enter the amount of square feet you use for business or for storage of inventory and the total square footage of the home.
Next, you will begin listing home expenses associated with your business. You will be asked to enter Direct and Indirect expenses. Unless the expense is related to 100% exclusively used business space, such as storage of inventory, you will enter the expense as Indirect.
You may enter 100% of direct expenses. Indirect expenses will be calculated using the business use of home percentage. These are the expense lines that you will see in which you need to enter your direct and/or indirect expenses:
| Expense | Direct Expenses | Indirect Expenses |
|---|---|---|
| Casualty Loss | |
|
| Deductible Mortgage Interest | |
|
| Real Estate Taxes | |
|
| Excess Mortgage Interest | |
|
| Excess Real Estate Taxes | |
|
| Insurance (e.g., mortgage insurance, property insurance) | |
|
| Rent | |
|
| Repairs and maintenance | |
|
| Business Use of Home - Expenses | |
|
| Utilities | |
|
| Other expenses (for example, cleaning and lawn care services, telephone and cable) | |
|
Business owners should be mindful not to enter expenses twice. If you list certain expenses like utilities or rent related to your home office or business use of the home, do not enter those expenses again when completing the Schedule C - Business Expenses section of the software.
In this next section, Excesses and Carryovers, you will only enter information if it applies to your situation.
You will then be asked about the Depreciation of Your Home. This is only applicable if you own your home.
Your home’s adjusted basis is usually the amount you paid for it plus the value of improvements made.
The fair market value is what the home would cost currently if it was on the market.
Accumulated depreciation is the total depreciation taken to date on the home.
After you enter details about your home, such as the date first used for business and adjusted basis or its fair market value, the system will depreciate the expense, based on your Time/Space Percentage, and provide you with the deductible depreciation amount for it. There is a separate category in TaxSlayer, “Depreciation”, where you can depreciate other large purchases that are not subject to your Business Use of Home Percentage.
Next you may see the Schedule A Adjustments screen which will show you what your calculated Business Use of Home Percentage is and the deductible mortgage interest and real estate taxes you have based on your business use of home.
You will then be taken back to the Schedule C summary page. There, you can go back and edit previous entries or move on.
Qualified Business Income (QBI) Deduction
As you complete your business-related tax sections, be mindful of the Qualified Business Income (QBI) deduction, also called the “pass-through income deduction”. QBI is the net amount of qualified income, deductions, gains, and losses from your business. This deduction allows you to deduct up to 20% of your self-employed/small business income from your total taxable income. If eligible, the QBI is deducted from your Adjusted Gross Income (AGI). So, while this is not part of the Schedule C, it is dependent upon your business income, which is why you’re asked about it when preparing your business taxes.
You will be asked additional questions to calculate your Qualified Business Income deduction. The first question is your qualified business income adjustment amount. This is because you need to adjust your qualified business income for the self-employment tax deduction, the self-employed health insurance deduction, and for your deduction for contributions to qualified retirement plans. Unless you are entering manual adjustments, you can leave this blank.
Here is more information from TaxSlayer on these QBI adjustments:
Enter the total amount of adjustments as they apply to you, otherwise leave this blank. If you are unsure of what your totals are, you can complete the remainder of your filing and come back to this section later to enter accurate information. If you have no adjustments to make, you will leave the first box blank.
If you paid W-2 wages to employees, you would enter the total amount paid. If you have no W-2 wages paid to employees, you will leave that box blank.
The program will automatically calculate your QBI based off of your business income entries.
A specified service business is one that is in certain fields such as health, law, consulting, athletics, financial services and investment management in which your status/reputation as a regarded member of that trade determines your income.
Typically, those individuals cannot take the QBI deduction.
Congratulations!
You’ve done it! You just entered all the information needed on your self-employment and can now complete the rest of the screens to complete your overall return.
How to Make Tax Preparation Easier
Many small business owners can self-prepare their tax return to save money and ensure their taxes are being done accurately. After all, no one knows your business like you do! The key to hassle-free tax filing is to have proper recordkeeping and bookkeeping throughout the year. Keeping track of all payments you receive and receipts and invoices for your purchases is invaluable and will save you a lot of time.
The importance of filing electronically
When it’s time to submit your taxes, submitting electronically is far better than printing and mailing your return. This is because there’s a higher degree of accuracy and the process is much quicker.
Need more time to file or to pay your tax bill?
You may find that you need more time to file or that you have a tax bill and need more time to pay it. If that happens, we suggest that you pay what you can and then request an extension. You will need to put in the request by April 15th, but you can receive an extension for up to 6 months. You will still have to pay additional penalties for not paying any taxes you may owe on time, but that will be better than ignoring it altogether. There is no financial penalty for filing an extension if you need more time to file and are owed a refund.
Need more help?
America’s SBDC represents America’s nationwide network of Small Business Development Centers (SBDCs) – the most comprehensive small business assistance network in the United States and its territories. Sponsored by the U.S. Small Business Administration (SBA), they provide management assistance to small business owners in the form of one-on-one counseling, training seminars, assistance with SBA loans, and technical assistance.
Small business owners and aspiring entrepreneurs can go to their local SBDCs for free face-to-face business consulting and at-cost training on a variety of topics. There are nearly 1,000 local centers available to provide no-cost business consulting and low-cost training to new and existing businesses. SBDCs help local businesses start, grow, and thrive.
You may also call 211 to get connected to additional resources and services that can help you, your family, and your business.
Preparing for Next Year
Now that you’ve filed your tax return this year, consider changes you might make to help the process go even smoother next time! Part I: Getting Ready for Tax Season will help you identify the business and bookkeeping practices you can implement to help ensure your business and your taxes go smoothly.
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Remember – if you work multiple unrelated gig types, you will need to complete a Schedule C for each gig type (for example, rideshare and freelance writing). However, if the gigs are related services but through different platforms, they can be combined (for example driving for both Uber and Lyft).
Note — for business rentals, you will enter $0 as the cost on the depreciation screen. That is because you do not own the car and cannot claim depreciation on it.