Now that tax season is on us, many workers will no doubt be rushing to get their returns done. This also includes the self-employed. While filing taxes as a salaried employee often means copying down a number from a W-2 and clocking out, there’s often a whole set of complications tacked on to the process for self-employed people. Here are a few key tips that’ll make the tax-filing process easier on you.
1. Keep accurate records of your income
When you’re a salaried worker, your income for the year is on one handy sheet of paper. When you’re self-employed, your income might stem from a variety of sources, making it harder to track.
Ideally, any client you work for will send you a 1099 form, provided you earn $600 or more. But not all clients do, or at least not on time. That’s why you’re better off recording your income independently rather than relying on 1099 forms that may or may not come in when you need them.
Furthermore, while companies aren’t required to send a 1099, if your earnings for the year come in at less than $600, you’re have to report that income. So going forward, create a spreadsheet that lists the date of each payment you receive who paid it. Incidentally, this will help you in the event that you wind up needing to dispute a 1099 down the line.
2. Keep detailed records of your expenses, too
Just as it’s critical to keep track of your income during the year, you must be meticulous about recording the various expenses you incur doing business. Some of them will be pretty obvious. For example, if you buy a new printer that costs $150, you’ll need to keep that receipt to ensure that you write off the proper amount on your tax return. But there are certain lesser-known expenses you’ll need to keep tabs on, as well.
For example, if you use your personal vehicle for business purposes, you’re allowed to deduct mileage. But to claim that deduction, you’ll need to keep a detailed log showing your starting and ending mileage for each business-related trip, along with the purpose of said trip.
Furthermore, it pays to keep track of your property maintenance and repair expenses if you work out of your home. That’s because you’ll need that information to claim a home office deduction. To be eligible for this potentially lucrative deduction, you’ll need to have a dedicated area of your home used solely for business purposes.
Furthermore, that space must constitute your primary place of business. But assuming you meet these criteria, you can tally up your home expenses and then write off a portion, depending on the size of your office relative to your total space.
For example, say you rack up $30,000 in various home expenses. If your entire property is 3,000 square feet, of which your office takes up 300 square feet, you can deduct 10% of your total, or $3,000. But you’ll need to keep accurate records to get that deduction just right.
3. Time your income for tax purposes
Salaried workers don’t control when their paychecks come in. They simply adjust to their employers’ pay schedules and roll with them. As a self-employed worker, however, you have the ability to time your income. This means that if you have a year in which your earnings increase and you’re worried that your previously submitted estimated tax payments won’t be enough to cover your total tax obligation, you can opt to defer income to the upcoming tax year, thus offsetting that increase.
For example, if you’re worried about owing too much money to the IRS in a given year and do a few major projects late in the year, you can wait to invoice those clients in January of the following year, thus ensuring that that particular income doesn’t count for the current year.
Though self-employed workers face their share of tax-related challenges, there are steps you can take to make your life easier. Track your income, record your expenses, and be strategic about collecting payments. You’ll be especially sure to appreciate it when tax season rolls around.
Call Scott A. Kunkel, CPA PC today in North Richland Hills at 817-498-1040 to have a chat about your small business tax health.
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Source: The Motley Fool