7 Tax Tips for the Self Employed

7 Tax Tips for the Self Employed Posted on: Mar 3, 2009 Share with friend Posted by: SBOCTeam Being self-employed is a dream for many people. Who doesn't want to be his or her own boss? Of course, the downside of being the boss is the all responsibilities that come with the job. Unfortunately, calculating and paying taxes are part of those responsibilities. By Christopher Freeburn According to the Internal Revenue Service (IRS), you are considered self-employed "if you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor." The IRS requires self-employed individuals 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 requires self-employed people to pay estimated taxes as a substitute for the withholding taxes that are applied against employed person's salaries. These factors make complying with self-employment taxes rules somewhat more complicated than the rules that apply to the employed. With that in mind, here are some tax tips for the self-employed: 1. Consult a CPA. Even if you are intent on doing everything yourself, it is better to seek outside help than make a mistake when preparing your taxes. An error on your tax returns can result in escalating fines and penalties from the IRS. Tax law is complicated, particularly when it comes to self-employment. To be certain you are in 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 point out tax liabilities and deductions that you hadn't considered. 2. Keep good records. Good record keeping is more than simply a good business practice; it is a necessity when it comes to dealing with the IRS, which may demand to see every last detail of your income and expenses, particularly when you claim deductions on your tax return. If you are ever audited-and being self-employed makes that more likely-you will need to have every receipt and document to support your claims. Otherwise, fines and penalties will accrue. Get in the habit of saving everything, and develop a filing system that allows you to retrieve needed documents quickly. 3. Deduct the cost of medical insurance. Self-employed people can deduct up to 100% of medical insurance premiums paid for medical insurance for themselves, spouses, or dependents. Medical insurance costs are deducted directly from total income. 4. Deduct all business expenses. Every drop of toner you buy for your printers, reams of paper, shipping expenses, postage, software, pens and pads, and anything else you use for your business is an expense that can be deducted. Be sure to save every receipt to back up your claimed deduction. Also be sure that you can justify the claim that the items or services purchased were used directly for your business. 5. Increase expenses to lower taxable income. As the end of the year approaches, you can increase you deductions against this year's income by making business purchases now. Need another printer, or PC? Better desk or cushy new office chair? Buying it before the end of the year means whatever you spend can be deducted against this year's income taxes. 6. Contribute to your retirement. The options for self-employed people to save for retirement have never been better. If you haven't created a retirement plan for yourself, now is a good time. Payments made to a retirement plan-401(k), IRA, KEOGH, or SEP plan-are deductible against the current year's income. Note that most retirement plans have a contribution limit. Most local banks or financial institutions will be able to help create and maintain your preferred retirement vehicle. 7. Consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or maintaining a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.

[Steve]

Lawn care business tips

Deduct the cost of medical insurance. Self-employed people can deduct up to 100% of medical insurance This is very interesting! 5. Increase expenses to lower taxable income. As the end of the year approaches, you can increase you deductions against this year's income by making business purchases now. Need another printer, or PC? This is another interesting topic. I think there are two schools of thought on this. One side is you should keep as much as you can and the other is increase expenses. What's your view on it?

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[musician/lawnman]

Hey Steve,
It should be noted that by medical expenses.... that means EVERYTHING.
Insurance premiums, Co-pays for dr. visits, Deductibles, prescriptions, even OTC. drugs, band-aids etc. can often be claimed.

I am going to do my taxes in the morning. I have just under $11,000.00 in medical expenses for my young, healthy family of 4 people. It adds up & you don't want to be paying income taxes on an amount like that if you don't need to.

As far as your question....
I think there's a balance. You shouldn't go blow $15,000 in december fo the hell of it. But if you forsee expenses & purchases you are going to need to make .... why not make them before the end of the year.

I have a friend who's wife is in business for herself. By listening to her you might think that if it's a write off, it was FREE! I've tried to explain but it's like talking to a wall. If you land in say a 28% tax bracket then roughly, you pay 28% of your income to taxes. If you buy a $100 desk & write it off then you don't pay taxes on that $100. It saved you $28. The desk still cost you $72. It's not free. It's better to think of it like a discount on things you buy for your business. The "oh, I'll just write it off" additude can get expensive.

[Steve]

It's not free. It's better to think of it like a discount on things you buy for your business. The "oh, I'll just write it off" additude can get expensive.

Very good point. I think all too often the concept of a tax write off gets us to think it is free but it's not. The more we see that, the more we can get a better grasp of what we are doing.