Tax Tips for the Self-EmployedPublished:
Special Tax Considerations for Self-Employed Individuals
The ability to work for yourself and be your own boss is an exciting prospect. Becoming self-employed in your field of expertise can give you the freedom to find a work-life balance that is hard to achieve when you are employed by a someone else.
However, with this freedom comes extra responsibilities, especially in regards to taxes. As a self-employed individual, you do not have an employer withholding taxes from your paycheck — instead, you must handle these obligations on your own.
The good news is that there are tax advantages to being self-employed, even though it does require extra work to manage your own records. As long as you follow the tax rules and regulations, self-employment can offer some major benefits.
Here are some tax tips that can help you get the most out of being your own boss, while also staying out of trouble with the IRS.
Tax Tip #1: Remember That You Are a Business
Even though many self-employed individuals do not necessarily have a brick-and-mortar office or employees, they are still a business. Whether you are a freelance designer or a sales consultant, you are a business first and foremost, and you should be keeping financial records like a business. This means creating monthly profit and loss statements, recording all expenses, and keeping detailed records of all payments received. Maintaining proper records will ensure that you have all the documentation necessary to file taxes and, if necessary, pass a tax audit.
READ: Understanding Income Tax Audits
Tax Tip #2: Take Advantage of Business Deductions
One of the biggest benefits of being self-employed is the ability to deduct certain expenses that other individuals usually cannot. Some of these benefits include tax deductions for your home office, the business use of your vehicle, and supplies purchased for your business. The IRS defines “deductible expenses” as any expenses that are ordinary and necessary for your business. Taking advantage of business deductions can make a big difference in your profit margin and your Federal tax liability at the end of the year.
READ: Can I Claim a Home Office Tax Deduction?
Tax Tip #3: Stay On Top of Estimated Tax Payments
Most people who are self-employed are required to make quarterly Estimated Tax payments using Tax Form 1040-ES (Estimated Tax for Individuals). Estimated tax is a method for paying income tax as well as Social Security and Medicare taxes. Since your taxes aren’t withheld from your paycheck by an employer, you are expected to send quarterly tax payments directly to the IRS. If these payments aren’t made, you will be penalized at the end of the year — and the IRS’ penalties and interest charges are not deductible expenses.
READ: 5 Tips for People Who Owe Taxes
Tax Tip #4: Keep Your Personal Accounts Separate
One of the most common mistakes made by self-employed individuals is not having separate accounts for their business income and expenses. Putting payments from your clients directly into your personal bank account (and paying expenses out of that same account) is bound to cause confusion when it comes to tracking your business transactions. To make things easier at tax time — and to eliminate possible errors regarding what can (and cannot) be deducted as business expenses — you should have accounts that are used strictly for business only.
Tax Tip #5: Deduct Your Benefits
As a self-employed person, you are responsible for paying your own benefits (such as health insurance and retirement plans). The good news is that these payments may be deductible as business expenses, which can save you a substantial amount of money off your tax liability. Just make sure you are careful to follow the IRS rules regarding these tax deductions.
To maximize your profits from self-employment, keeping your tax liability low should be a top priority. If you are new to running a business, it may behoove you to seek the advice of a tax professional to learn more about what tax deductions are available for your business. Every dollar that reduces your taxable income will make a difference in the taxes you owe at the end of the year, directly impacting your bottom line.
READ: 5 Tax Tips for New Businesses