Self-employed individuals need to pay taxes, and it’s important that they do so on a regular basis. For one thing, it shows your government that you’re an upstanding member of society, and for another – it’s the law.
Taxes provide services such as roads to drive on and teachers who educate our children. Not reporting your self-employment income can result in stiff penalties, fines, or even jail time.
Still, filing taxes can be an arduous process for contractors. A good idea would be to enlist the services of an IRS tax attorney, who can optimize your tax situation and help handle existing or potential disputes. Taking a proactive approach toward your taxes is imperative. With that in mind, here are a few tax tips for self-employed individuals.
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1. Estimate Your Income
The IRS doesn’t want you to be surprised when tax time rolls around, so estimate what your earnings will be for the year by keeping track of all business expenses related to income during the year.
This includes transportation costs associated with getting to and from your job (mileage or public transportation fare), office supplies used for work, training seminars attended to make yourself more marketable, and even the cost of having a home-based business.
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2. Know Your Tax Deductions
There are many deductions available to self-employed individuals; some are straightforward; others require special attention.
First, note that when it comes to tax deductions, not all expenses you incur for your business qualify. For example, the IRS doesn’t allow deductions for commuting costs, since they aren’t directly tied to getting work done.
In contrast, most other travel costs may be deducted so long as they’re only related to business activities — meaning you can deduct mileage if it takes you away from home overnight for a business meeting.
Generally, the cost of supplies and materials directly related to income is also deductible, as well as any fees paid for professional training or certification. In addition, many home offices qualify for special deductions, such as a percentage of your rent or mortgage payments if you use part of your home exclusively for work purposes.
Per country, tax deductions and coverage differ. It’s ideal to know more about your tax deduction as self-employed on your government taxation website or office. In some countries such as Australia, home office renovation and extensions are covered by the tax return. Use a tax return calculator in helping you sort and find out how much you can get from your taxes.
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3. Know Your Tax Dates
The tax due dates vary depending on whether you prepare and e-file your own taxes or hire a tax professional to do them for you. If you opt to file taxes yourself – which costs nothing – the filing deadline falls on April 15th every year.
As long as you file by then, self-employed individuals can typically wait until October 15th to pay any taxes due. If you hire an accountant or tax professional, you’ll likely need to pay your income tax bill by January 31st of the following year. But if it’s filing deadlines that worry you most, know that both e-filers and paper filers automatically receive six extra months (October 15th) to file their federal returns each year.
4. Estimate Your Tax Refund
If you’re expecting a sizable refund at the end of the year because you paid too much in estimated taxes for the year, consider opting instead to adjust your quarterly payments throughout the year so there’s less left owed come April. This way, not only will you avoid owing money on your taxes at the end of the year, but you’ll also get a nice little refund check every three months.
5. Don’t Skip Filing
Even if you don’t think you’re going to owe taxes for the year, don’t skip filing your tax return altogether. By skipping filing, you only open yourself up to drawing attention from the IRS and potentially having them initiate an audit. Before you know it, they may start charging interest on what they consider overdue taxes.
Also note that even if you can’t afford to pay Uncle Sam right away, filing a tax return is still a must– because it qualifies you for refunds such as federal energy credits and child tax credits (among others), some of which require that your tax returns are filed before any money can be released.
6. Annual Expenses Can Lower Taxes
Keep in mind that you can deduct many common business expenses on an annual basis, even if they exceed your income for the year. For example, if you start a new job in January and purchase supplies throughout the year to complete it (such as pens, pencils, pads of paper), but your annual salary is less than what you spent on those supplies, then these expenses are deductible. Save all receipts related to tax-deductible expenses; this may make filing taxes easier when it comes time to do so.
7. File Your Return Even If You’re Self-Employed
Failure to file your return could result in interest charges and penalties, even if you didn’t wind up owing any money. If you’ve found yourself in this situation, consider hiring a tax professional or filing your taxes yourself.
Alternatively, if you can’t afford to pay for help with your taxes in full, the IRS offers an installment payment plan in which you make monthly payments until all of your outstanding balances are paid off, although be aware that interest charges will apply.
Lastly, it is highly recommended that one obtains professional assistance when completing their own income tax returns. Tax preparation software can be helpful but may not always provide enough information to complete the return completely and accurately.
Professional assistance provides more thorough guidance throughout the process and reduces the probability of errors or omissions to increase the chances of getting a bigger refund or reducing the amount owed back to the IRS.
It is also suggested that one takes advantage of all possible deductions and credits they can claim to reduce tax liability as much as possible.