Welcome to self-employment! Whether you run a part-time lash business on the side, freelance for production companies for film or product manufacturers as a platform artist, or own your own mini-salon suite, you’re in good company. If you are new to the self-employment journey, there are some financial changes that you may need to prepare for, including taxes. We know . . . it’s no fun . . . especailly during COVID-19.
1. First, confirm your status.
This is simple to do. If you receive a 1099-MISC, you’re a self-employed independent contractor. And you’re not alone! Currently, hundreds of thousands of stylists work for themselves within beauty and barbering because of the flexibility in both working hours and where you service your clients.
2. Take advantage of those business tax deductions. Your day-to-day purchases really add up.
The money you invest in your hairdressing business comes at a significant tax advantage. Upfront costs for setting up the business—like dryers, furniture, and equipment for your workspace—can reduce the amount of taxes you owe.
If the supplies you purchase will last for a long time, you can claim some of these costs for a smaller tax break spread over several years (a process called depreciation). If they’ll last a year or less, expense them upfront as a regular business deduction using the Section 179 deduction. For example:
- If you purchase a barber chair for $1,500, for example, you can depreciate that cost over 5 years.
- If you go for a section 179 deduction, you could deduct the entire $1,500 in the first year (provided your total section 179 deductions don’t exceed $1,000,000 in 2019).
You may also be able to claim other costs associated with operating your business like:
- running ads
- hosting your Web site
- paying rent or fees for the salon or barbershop space you lease
- and purchasing supplies like color, foils, neck strips, shampoo, chemicals, towels, shears, small tools and capes all help to reduce your taxable income—and the amount of tax you’ll owe
If you maintain an office out of your home, you may be eligible for home office deductions for a portion of the cost of rent, utilities, and homeowners’ insurance. The cost of licensing, legal fees, and business-related insurance premiums are also tax deductible.
IMPORTANT! Don’t forget to report tax breaks from all those continuing education courses
Training and personal development not only ups your earning potential, it offers some tax benefits—so go ahead and take that course on perfecting the art of balayage! Paying for training at a recognized post-secondary institution can lower your tax liability if you claim an education tax credit, and some or all of your scholarship funding may be tax-exempt. You may also be able to claim continuing education costs via the Lifetime Learning Tax Credit or as a tax deduction from your business income.
3. Prepare to pay quarterly self-employment taxes.
Instead of the familiar W-2 from a single full-time job, self-employed stylists may find themselves juggling multiple 1099s, wrestling with the time-consuming work of tracking expenses and deductions, and understanding how to plan, save, and submit timely quarterly tax payments.
The truth is, full-time employees don’t typically think of taxes as expenses in their household budget; as self-employed workers, we have to. That’s why staying on top of taxes throughout the year is vitally important, especially since the IRS comes calling every four quarters, instead of annually.
4. Remember some key self-employment tips.
Know your 1099 income is pre-tax. Learn what your true income is after taxes.
Keep track of your 1099 income and expenses through some form of consistent bookkeeping. Use your office day to organize receipts, purchases, mileage, etc. THIS IS IMPORTANT.
Get in the habit of saving for quarterly self-employment tax payments every time a client pays you. The rule of thumb is to save about 30% of your 1099 income. (Sometimes it’s less.)
Adjust your tax rate as your income and filing status change each quarter.
Submit your quarterly tax payments every quarter. THIS IS IMPORTANT. It legitimizes you as a real business.
5. Find a tool that works for you.
When it comes to balancing income and expenses, finding a resource that helps you with multiple self-employment tax needs is essential. Take a look at either Turbo Tax Self-Employed or the AARP Foundation Self-Saver tool.
6. Educate yourself on the IRS Q1 Payment Cancellation for COVID-19 Relief
That’s right. With the impact of the coronavirus, the IRS has canceled the Q1 2020 Quarterly Estimated Tax Payment for all self-employed individuals. You can read more about the taxpayer relief and the Internal Revenue Service’s Coronavirus response.