Payment of taxes for self-employed individuals is not the same as it is for employees. If you work on your own, you need to prepare and file your taxes a little differently. If you are not ready to prepare your self-employment taxes properly, you can easily run into problems and end up paying more.
It is said that ‘tax is a minefield for the unwary’. If you are a self-employed individual you need to exercise even more precaution. If you have started to work on your own, you really need to know and understand how to file your taxes. If you skip filing your taxes, it can lead to more problems, and this is not good for your business in any way. As a self-employed individual, you will never want to get into trouble as it will ultimately hurt your businesses and impede your growth.
Given below, are some of the most important tips that will help you avoid tax problems as a self-employed individual.
When you start to work on your own, you first need to decide what kind of structure your business will have. Self-employment has many structures – sole proprietorship, an LLC, an S-corporation, etc.
In each case, filing for taxes will vary a little. For example, sole proprietors will need to report their income and expenses on Schedule C. If you are a sole proprietor, it is your responsibility to pay self-employment taxes. If you work with a business partner, you will need to file your taxes as a partnership or corporation. Likewise, there are different terms for S-corporations and LLC. Therefore, it is important for you to determine what kind of structure your business will have. Knowing these things in advance will help you avoid problems and prepare more effectively.
This is a no-brainer for many people. If you are a self-employed individual who is earning an income, you will need to pay taxes. The IRS has a simple rule: If you are making money, you need to pay some of it in the form of self-employment tax.
In case you have launched a new business and hardly earned a cent, you will not need to pay your self-employment tax. According to tax professionals, self-employed individuals who are earning at least $400 will be required to pay taxes. Usually, if you start a business in 2020 and earn an income too, you will need to prepare for and file your self-employment tax return in 2021.
If you have ascertained your business structure, it is time for you to start planning for your taxes ahead of time. You need to do the preparations in a way that can bring you tax deduction benefits.
Get a tax ID number. This is the first step in terms of preparing your self-employment tax. Your customers who need a W-9 form will ask you for this number. If you have got a couple of people working for you, this will be required.
In regard to preparing your self-employment tax, there is one important thing that you need to consider. In fact, it is a decision you should make. Who exactly will take care of your self-employment tax preparation? You can either do it on your own or hire someone who is a tax professional.
While you may want to prepare and file your taxes yourself, hiring a professional can lead to many benefits. A professional knows what they do and they can take care of it in the best way. As a new self-employed individual, you may not have sound knowledge of what to report and what not to report. But an expert is quite well-versed with everything. Also, the average rate for hiring these tax professionals for doing your taxes isn’t too much.
Since you are working on your own, it can be easy to ignore the usefulness of all the documents and records. If you plan to avoid problems later, you should start getting all your paperwork in order from day one.
Always stay above your paperwork, particularly the records of your income and expenses. Gathering these records will enable you to get tax deduction benefits when you file your self-employment tax. The amount of records one needs to collect may vary from one type of job to another.
Regardless of the nature of your job, make sure you do not miss out on any records. As a self-employed individual, you will need computer equipment and printer ink which will also be required on a regular basis. These are just a couple of examples. So, you need to track all such things and keep a good record of all your income and expenses.
As a self-employed person, you have the opportunity to claim a range of tax deductions. However, you need to know and understand all those deductions that are available to you. Depending on your eligibility, you can take advantage of many deductions and bring down your tax bill.
If you are a self-employed individual, you are most probably working from a home office. If you have this space, you can be eligible to benefit from home office tax deduction. However, it is important to understand that your kitchen table does not count as one. A home office is an area that you have chosen or created specifically for doing your work. Any room that you separate for doing your work counts as one; so, if you have this, you can get some home office deduction benefits. You may be able to deduct the cost of your electricity bills, telephone bills, insurance payment, etc.
Keep in mind that you will need to purchase a range of office supplies. All these things can be deductible. So, you need to make sure you keep the records properly.
As a self-employed individual, you may need to travel for meeting clients in different locations. You can qualify for the deduction of the travel expenses, provided that it was purely for business purposes. To avail this deduction benefit, your travel period must be longer than a working day, at least. Furthermore, it requires you to stay overnight outside of your city. If you plan to get travel deduction, you should gather the records of all your expenses.
If you use your vehicle for business-related purposes, you can avail yourself of this tax deduction. The expenses incurred by the use of your vehicle need to be recorded. Make sure you gather and keep records of the date of your trips, purpose of your trips, mileage, etc.
It is important to understand that you cannot mix your personal trips with your business trips. Only the care operating expenses that relate to your business will be considered. Key expenses you need to track include gas/oil changes, repairs, registration, insurance, etc.
Being self-employed, comes with a lot of tax deduction benefits, as mentioned earlier. Getting deductions for your health insurance premium is one of them. If you have health coverage and you pay the premium on your own, you can avail tax deductions for all of your health insurance premiums – health, dental and long-term care. Moreover, you can get deductions even for those premiums that were paid by you for your spouse’s coverage.
Likewise, there are many other tax deductions that you can take advantage of as a self-employed individual. These include the ones for meals (while traveling or meeting with clients), office space rent, business-related education, business insurance and startup costs among others.
Self-employment tax deductions provide you with a good option to subtract a certain amount of cost incurred by operating your business, every year for many years in a row. If you have some confusion as to whether a particular expense is deductible, you should simply ask yourself – “Is this expense necessary in my line of business?” If the expense is necessary, you can most probably get deductions for the same.
When deciding how you should be paying, you need to calculate the estimated tax you will owe to the IRS. Depending on this calculation, you can decide to pay your taxes either annually or quarterly. If the tax estimation is done, you can pay it on a quarterly basis. Paying your self-employment tax this way will keep you safe from penalties or interests. A lot of self-employed people pay their taxes on a quarterly basis to avoid problems that may arise later.
Seeing a hefty tax bill all of a sudden can give you a big headache. It can also affect your productivity and your business as a result. To avoid this problem, you should create a separate account for tax money. It is a good idea to allocate at least 15 to 20% of your income as tax money and send it to your tax account. When the tax bill arrives, you will not get a headache because you have already kept some money aside to pay your taxes.
Usually, contributing to an IRA is ignored by many people. If you are self-employed, you should definitely consider this as a tax deduction. Paying into a self-employment retirement fund like a SEP IRA pays great dividends. This step does not just help you save money towards retirement, but it also enables you to get more tax deduction benefits.
If you are a self-employed individual or planning to launch your own start-up soon, these tax filing and preparation guidelines will definitely help you a great deal and guide you in the right direction. While self-employment gives you a lot of freedom, it also brings you the responsibility of handling your taxes in a timely and effective manner. Provided you are well-prepared, you will be able to avoid problems and make tax preparation pain-free. You can contact SCL Tax Services if you have any questions regarding your self-employment tax.