Being able to work for yourself is exciting. It allows you to do something you love and achieve a work/life balance that cannot be achieved when you are working for someone else. However, with this newfound freedom you also have extra responsibilities, especially tax wise.
You no longer have an employer who withholds taxes from your paycheck; instead, you have to handle everything on your own.
The good news is you do get to claim self employed tax deductions, even if you do have to manage your own records. However, as long as you follow the tax guidelines, you can receive some amazing benefits.
Today we are sharing some tax tips that will allow you to get the most out of being your own boss, while avoiding trouble with the IRS.
Table of Contents
Even if you do not have a “brick and mortar” office or employees, you are still a business. It doesn’t matter what your title is, you are a business and you have to keep track of your finances as one.
This means you need to have monthly profit and loss statements, records of all of your expenses, and detailed records of payments that you receive. By having everything organized, you will be able to file taxes easier and pass a tax audit if one occurs.
Use Business Deductions to Your Advantage
One of the biggest advantages of being self-employed is you can deduct expenses that employees cannot. You can deduct your home office, business vehicle mileage, and supplies that you purchase for business use.
The IRS labels these things as “deductible expenses”, which are expenses that are ordinary and required for your business. By taking advantage of these tax deductions, you will see a difference in your profit margin and federal tax liability – and not a small one either.
Pay Estimated Taxes
You will be required to make estimated tax payments quarterly using Form 1040-ES. This insures you pay social security and Medicare taxes. Usually employers withhold taxes, but since you are now a business, you are expected to send quarterly payments directly to the IRS. If you don’t do so you will be penalized and have to pay interest. These expenses are also not deductible.
Keep Personal Accounts Separate
Do not make the mistake of keeping all of your finances together. If you put payments with your personal money, you are going to be confused down the line. To make filing taxes easier and avoid making errors you should have “business only” accounts.
Don’t Forget to Deduct Your Benefits
You are responsible for paying for your own benefits such as health insurance and retirement plans. The good news is you may be able to deduct these medical payments as business expenses during tax time, which saves you money. Just be sure to follow the IRS rules regarding this type of tax deduction.
To maximize your profits as a self-employed individual you have to claim tax deductions for self employment.
If you are new to running a business, it can be a good idea to talk to a tax professional for guidance. Each dollar that lowers your taxable income helps you decrease the amount you pay at the end of the year.
Remember, when you file your taxes with H&R Block, you don’t need to know which schedules to fill out. We’ll ask you simple questions about your business and put your answers on all the appropriate 1040 tax forms.