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Whether you use an accountant or you prepare your own taxes, self-employed taxes are often difficult. There are many things to keep in mind when tax time rolls around and being prepared is always the best medicine. Being self-employed brings with it many unique tax concerns. There are ways however, of ensuring that you make the most out of your taxes.
First of all, you should always keep records. In fact, your records should be as detailed as possible and contain even the seemingly minute facts. Larger companies will typically have specific departments to maintain their income and expense records. Small business owners must maintain their own records, and these records must be complete. Be sure to save every single receipt that you acquire and you should have all the paperwork available to support every deduction that you take.Office space can be your best friend when it comes to taxes. Whether you have a home office or a separate building altogether, you are allowed a deduction for office space. If you operate from a home office, you will be permitted to deduct the percentage of your home that you use for business purposes. You will need a square footage calculation of both your entire home and the office space that you use. By dividing your home’s square footage by the square footage used for your office, you will get the percentage that you are permitted to deduct. Be sure to take this percentage off your year’s mortgage or rent payments, as well as any utilities that you use in the home. For instance, you will be able to deduct a percentage of your electric bill payments, water, gas and any other utilities that you use. Be sure to deduct a percentage of your phone bill, unless you have a separate phone line for your business. If this is the case then you will deduct the entire phone bill for your business line. Be sure to also include any internet charges that you incur if your small business is operated online. You should also keep good records of any business expenses such as travel, office supplies, subscriptions that are used for business purposes, fees or organizational dues, shipping and postage costs. A good rule of thumb is to always request a receipt of any expenses when you first incur them. Be sure to keep a filing cabinet with space for all your business expenses and keep all your records in the same place. This will help you to quickly prepare your paperwork when tax time rolls around. Remember also that just because you own your own business, and particularly for those who work from home, you are permitted to deduct childcare costs if you incur any. There are deduction allowances for nannies, daycare and any babysitting that you must pay while you are working or traveling for business purposes. You will find the tax time bite to be much less severe if you take every deduction that is allowed to you, so do not forget to keep records of any child care services that you pay for throughout the year. You are also permitted to deduct medical expenses for your family members if you employ them, so if you have something for your family to do that will help you to run your business, legally employ them. This goes for any family member in your home as long as the employment is legitimate. These deductions can add up throughout the year, so make good use of family members if needed. You are also allowed to defer your income if needed. You can alter your billing if you believe that you will be going into a higher tax bracket. Pay attention to this throughout the year and make the changes when necessary to stay in the lower tax bracket and save yourself hundreds or even thousands of dollars come tax time. You can also deduct half of your FICA payments for the year. Since you are self-employed you will be paying both the employee and employer requirements for Social Security taxes. The allowable deduction is half the payments when you file your end of the year taxes, so be sure and take advantage of this tax break. If you haven’t already done so, set up a good retirement plan. Setting up a qualified self-employment retirement plan such as an IRA is not only a good tax strategy but it will also help you in your retirement years. You can begin an IRA for around $2,000 or less. However, if you wish to invest more than $2,000 initially, you can choose to open a Keogh plan. This allows you to save more money in a tax-deferred account. You may find that your expenses do not quite keep up with your income. Remember that you can defer your income if necessary, but you can also increase your expenses to help soften the blow of that high income. If you believe that your income to expense ratio is too high toward the end of the year, make more purchases for your business to take some of the impact off your income. You can purchase anything that you need for your business, as long as they are legitimate purchases. Computers, office supplies, and other things that can be proven to be business expenses can be purchased at the end of the year to help bring up your expense deductions. Just be sure to make those purchases before midnight on December 31st, or they will be added to the next year’s taxes. Above all, seek help if you need it. Not everyone will have the ideal paperwork every year. If you are having trouble understanding the deductions and required documents, then speak to an accountant or someone you know who has experience in filing their own self-employment taxes.
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