4 Tax Tips for the Self-Employed
There are over 21 million solo or one-person businesses in the United States according to the Census Bureau. Being a “solopreneur” has its benefits as well as responsibilities. The procedure of filing taxes, for one, is more complex than the simple one form process for an employee. To avoid having tax problems, study the federal and state tax laws and regulations or seek the assistance of an accountant, reminds Catherine Clifford at Entrepreneur.com. Remember than each state may have its own regulations and laws. Tax experts – Gene Zaino, Sherrill Trovato, and Charley Moore – offer some tips on the self-employment tax, Social Security and Medicare, structuring the business, organizing receipts and classifying temporary workers.
1. Expect to pay the self-employment tax. If you are self-employed, either full or part time, and have net earnings of $400 or more per year, you will have to pay the self-employment tax. This additional tax, which includes obligations for Social Security and Medicare, tends to surprise many new solopreneurs.
2. Pick your business structure carefully. A self-employed person must determine how he or she will structure the business legally. The legal structure of your business–whether a sole proprietorship, S corporation, C corporation or limited liability company–determines the degree to which your personal assets are protected from your business assets in the event of a lawsuit.
Equally as important, the legal structure of your business affects how much you owe in taxes and the amount of paperwork required to file those taxes. Sole proprietors are likely to find it easier to pay taxes, but don’t have the same legal protections as those who set up as C or S corporations or LLCs.
3. Keep receipts organized. One benefit of starting your own business is the ability to deduct business expenses from your taxable income. Be sure, however, to keep paper or digital receipts in case you get audited.
One expense solopreneurs often take advantage of is the home-office deduction, which can be claimed on IRS form 8829. If they work out of their homes, they can deduct part of their housing expenses. Another common, but sometimes overlooked deduction is the cost of using a personal vehicle for business purposes.
4. Understand the worker misclassification rules. Self-employed individuals may enlist others to handle some business projects or other tasks. But be careful not to misclassify them because it can be a costly mistake.
If you hire someone to complete a temporary, specific project, on an independent contractor basis, for example, be sure to draw up an independent contractor agreement to establish the nature of the arrangement, Moore advises. Also, ask the independent contractor to fill out an IRS 1099 form and report your payment to him to the government. …
Photo by thedailyhamster