Tax Tips for Self-Employed and Freelance Workers
Being self-employed is a daydream for so many people. Who doesn't fantasize about becoming his or her own boss? When it comes to work, however, the downside of being the boss is all the obligations that go with the job. Regrettably, calculating and paying taxes are part of those duties.
According to the Internal Revenue Service (IRS), you are considered to be self-employed “if you are in business for yourself, or carry on a trade or business as a sole owner or an independent contractor.” The IRS requires self-employed persons to pay a Self-Employment Tax, which assesses Social Security and Medicare taxes similar to those paid by employees and their firms. The IRS also expects self-employed people to pay quarterly estimated taxes as a replacement for the withholding taxes that are applied against an employed person's wages. These factors make complying with self-employment taxes rules more complex than the rules that apply to the employed.
With that in mind, the following are some tax tips for the self-employed:
Consult a certified public accountant. Even if you plan to be doing everything yourself, it's better to seek outside help than make a mistake when preparing your taxes. A mistake on your tax returns may end up costing you escalating fines and penalties from the IRS. Tax law is complicated, when regarding self-employment. To be sure of your compliance with all relevant requirements, talk to a certified public accountant and review your situation. A CPA will be familiar with the federal, state and local tax laws that apply to you. Additionally, a CPA may be able to notice tax liabilities and deductions that you hadn't thought about.
Keep well-ordered records. Meticulous record keeping is more than just a responsible business practice; it's a necessity when dealing with the IRS, which may demand to see every last detail of your income and expenses, particularly if you claim deductions on your income tax return. In case you're ever audited (and being self-employed makes that more likely, especially if you run a heavily cash-based business) you must have every receipt and document to support your claims. Otherwise, fines and penalties will accrue. Get into the habit of saving everything, and create a filing method that lets you retrieve necessary documents quickly.
Buy health insurance. Self-employed people can deduct up to 100% of medical insurance premiums paid for health insurance for themselves, spouses or dependents. Health insurance costs are deducted directly from total income.
Deduct any and all legitimate business expenses. Every drop of toner you buy for your printers, reams of paper, shipping expenses, business...