Weekly Tax Advice: How Self-Employed People Should Plan Their Tax Returns

Posted on March 13 2014

Being self employed or working as a freelancer definitely has its perks, like setting your own schedule and having the freedom to go on vacation without getting approval from your boss. But come tax time, many self-employed people find themselves scrambling to complete their tax returns on OnePriceTaxes and pay their tax bill. A little planning will go a long way in making it easier for you to file your taxes. Plus, you'll have a better chance of ending up with a tax refund instead of a tax bill when you're done.

Determine Your Business Entity: Your first tax when planning your tax return is to determine what kind of structure your business has in a legal sense. Many self-employed people who are just getting started will end up in what is referred to as a sole proprietorship. If you're working alone, this allows you to just report your business income on Schedule C on your personal tax return, rather than having to file a separate business tax return.

If you work alongside at least one other person, you will need to file as a partnership, S-corporation, or C-corporation. Each business entity has its own tax ramifications. A partnership has to file an informational return in addition to each of the partners reporting income on their personal returns. An S-corporation can set a salary for employees so you pay taxes corporately and get a W-2 with your income, which makes filing your personal taxes with OnePriceTaxes simpler. A C-corporation is taxed on profits at a corporate level, but it also gets to take special tax deductions and set salaries as with an S-corporation. The right choice for your business depends on your business size, structure, and expected profits, and you should discuss your options with a CPA to determine the best course of action.

Tally Deductions for Expenses: Not all of the money that comes through the door of your business needs to be reported as income. First, you get to deduct your business expenses. Nearly everything you purchase for your business can be deducted from the money your business brings in. This includes products, supplies, equipment, travel expenses, and any compensation you pay to employees or contractors.

Two of the biggest expenses you can deduct on your tax return are vehicle expenses and office costs. For your vehicle expenses, either log your mileage throughout the year and multiply it by the standard mileage rate or tally your actual expenses. Your actual expenses include depreciation, maintenance, gas, and insurance. For your office costs, you can claim the full cost of renting an office space and paying for utilities and cleaning there. If you have a home office, you can claim expenses based on the square footage of the office, either at a standard rate of $5 per square foot or as a percentage of the costs for your home as a whole.

Pay Self-Employment Tax: If you're in business on your own, you may be surprised to discover the self-employment tax your first year. This is the equivalent to the Social Security and Medicare payroll taxes that are deducted from paychecks of employees at traditional companies. What you may not have known is that in addition to the portion you pay, the employer also pays an equal amount. When you're self employed, you have to pay both parts, for a total of 15.3% tax on all of your income. This is before you even pay income taxes, which will probably take another large chunk out of your income.

Depending on the scope of your business, you may owe special taxes beyond the self-employment tax. For example, if you hire people to work for you, you are responsible for the business portion of the payroll taxes discussed above. If your business sells products, your state may require you to collect sales tax on each sale and pass it along to the state government. You should find out what taxes you will be responsible for when you go into business or make major business decisions so you don't get surprised by a big bill when tax season rolls around.

Rather than paying these taxes in a lump sum when you file your tax return, you should make estimated tax payments throughout the year. In fact, in some cases, you can be faced with IRS penalties for failing to pay estimated taxes and having a big bill at the end of the year. To file estimated taxes, you just send a check to the IRS in April, June, September, and January for the amount you estimate you owe in taxes due to your business activity the previous quarter.

Get Deductions for Self-Employed Individuals: The last thing to remember when you're planning our tax return is that you will likely qualify for some additional deductions when you are self-employed. For example, you get to deduct the half of the self-employment tax that is attributable to the employer. If you purchase health insurance on your own and are not eligible to get it through your spouse or parent's employer, then you can deduct the cost of premiums for you and your spouse and dependents who cannot get health insurance through their employer. If you set aside money in a retirement account, like an IRA or 401(k), you may be able to deduct these contributions on your tax return.

Paying your taxes when you're self employed may feel extra complicated the first time around, but it gets easier as you better understand the process. The most important thing you need to be doing to plan is to keep detailed records of your business income and expenses. As long as you have kept track of all this information during the year, you will have everything you need to accurately complete your tax return.

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