If you’re self-employed, you generally have a trade or carry a business. Two types of self-employment are: sole proprietors and independent contractors. If you work as an independent contractor and have not setup a business entity, like an LLC or corporation, your business is essentially the same as a sole proprietorship when it comes to taxes. Being self-employed brings many advantages. For example, flexibility, potential for increased income, a more personal relationship with people or companies who pay for your services. Another major advantage of being a sole proprietor or an independent contractor is that it allows opportunities to reduce your taxes. Here are six tips you should know if you’re self-employed:
- Self-Employment Income: Self-employment income is comprised of income you received from part-time work in addition to another job you may have. Self-employment income is a position where an individual works for their self instead of working for an employer that pays a salary or a wage. A self-employed individual earns his or her income through conducting profitable tasks from a skill or business that he or she operates directly.
- Schedule C: As a sole proprietorship or an independent contractor, the IRS requires you to file Schedule C with your 1040 tax return. Schedule C allows you to report your income in Part I on the front of the form and then to categorize and report your expenses in Part II on the front of the form. You then add up and report your net profit or loss on Line 31. That bottom line number is what carries over to your 1040. This is where help from your accounting firm saves time and money. Having a trusted accountant can make all the difference when filing your taxes.
- Self–Employment Tax: Depending on the amount of your earnings for the year, you may have to pay self-employment tax. Self-employment tax (SE tax) is the Social Security and Medicare tax paid by self-employed individuals. It is similar to the Federal Insurance Contribution Act (FICA) which is the Social Security and Medicare taxes withheld from an employee’s paycheck. Use Schedule SE, Self-Employment Tax, to figure out taxes owed. If you still owe tax, attach the schedule to your federal tax return.
- Estimated Tax: When you’re self-employed, you are paid the full amount you earn. Nothing is subtracted from your check for Social Security, Medicare and income taxes. In its place, you make estimated tax payments during the year to pay your SE and income tax. If you don’t make estimated tax payments, then you pay those taxes when you file your return. To avoid paying a hefty amount on your taxes, hire an accountant who can prepare yearly installment payments. This way, you’re not stuck owing an astronomical amount on your return. Having a reliable accounting firm keep you on track will minimize your risk of penalty, lower the amount you may owe, and increase your possible payout.
- Allowable Deductions: A deduction is any item or expenditure subtracted from gross income to reduce the amount of income subject to taxes. It is also referred to as an “allowable deduction.” You can deduct expenses that are both ordinary and necessary. An ordinary expense is one that is common and acceptable in your industry. A necessary expense is one that is helpful and proper for your trade or business.
- When to Deduct: Usually, you can deduct expenses in the same year you paid, or acquired them. However, you must capitalize, rather that deduct, some costs. These costs are part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. This means you can deduct part of the cost over a number of years.
Having a trusted and reliable CPA can save you time and money. You need to protect your business from fees, fines, and audits. A knowledgeable accountant knows the tax code inside and out, far more than a software program you may use on your own. An accountant can help you find deductions for your business in order to maximize your savings. Furthermore, accountants are expert in seeking out and eliminating red flags that could lead to an audit. In the end, having a CPA assures savings, security, and convenience. Abedian + Totlian is a full service CPA firm offering accounting, tax, and business consulting solutions that can help shape the worth of your business while easing your financial worry. Contact Abedian + Totlian today to learn more!