Tuesday, March 17, 2015

Tax Preparation Tips for the Self-Employed

There are few Americans who do not dread the hassle of filing their taxes, but while it can be a headache for some, it can be an absolute migraine for those who are self-employed. There are more than 800,000 self-employed Americans, according to the Bureau of Labor Statistics. And while they can enjoy setting their own hours and take pride in being their own boss, they are also responsible for taking the tax preparation reins.
As in all things tax-related, what one doesn’t know (not to mention slipshod or incomplete recording keeping) can cost you. Here are some tax tips for the self-employed:
  • Self-employment income can include pay you receive for part-time work you perform out of your home. This could include income you earn in addition to your regular job.
  • You must file a Schedule C, Profit or Loss from Business or Schedule C-EZ if your expenses are less than $5,000 with your standard 1040.
  • Use Schedule SE to figure your self-employment tax, which must be paid in addition to income tax. Self-employment tax includes Social Security (12.4 percent) and Medicare taxes (2 percent).
  • People typically make estimated tax payments quarterly to pay taxes on income that is not subject to withholding. There are penalties if you fail to do so or if you underpay.
  • Be sure you are taking all the deductions to which you are entitled. If it relates to your business, it’s deductible.  Among what the IRS deems “ordinary and necessary” expenses you can claim are: mileage, gas and tolls; equipment, postage, business meals and entertainment, and subscriptions to appropriate publications.
  • If you pay cash, keep receipts. Record all transactions, including bad business debt. Putting money into a retirement plan is not only good planning for the future. It also affords a tax break if you make salary deferrals up to $18,000 this year.
  • In addition to your 401(k), you can also deduct your health insurance as well as benefits paid to employees.
  • For those to whom the process is daunting, perhaps the most welcome write off might be for tax preparation software or professional assistance.