Self-Employed Tax Tips

A benefit to being self-employed is the ability to deduct many expenses that will lower your effective taxable income.  Anytime you have to buy supplies or equipment to operate your business, those expenses may be used as business deductions.  The majority of people that are self-employed do not realize the vast amount of deductible expenses that they may claim.  

If you are self-employed, it might be in your favor to hire a qualified tax professional.  Tax laws typically vary at least a small amount every year, and it’s crucial to keep up with the changes.  Otherwise, it might seem that the new laws are working against you, rather than for you. 

When you are self-employed, it is your responsibility that your income tax is filed accurately and timely.  Quarterly estimated tax payments are required for self-employed people.  In the event that you have any employees, it is also your responsibility to accurately withhold income tax from each employee paycheck.  You are then required to make these tax payments for the employees to the respective state authorities and the IRS. 

For federal income tax on your self-employed income, you may use the 1040-ES form.  It contains instructions on how to correctly estimate your tax payments and has coupons for remitting your payments.  The 940 and 941 forms are what you may use to withhold federal income tax from your employees and subsequently submit it directly on behalf of your employees.  It is also important that you contact your respective state for the proper procedure concerning withholding income tax from employees and the related estimated taxes. 

Anytime you purchase something for your own business, it is beneficial to always pay with a credit card or with a check, instead of cash.  Paying with cash can make record keeping difficult for tax purposes.  In the event that you do not maintain a ledger or any other bookkeeping system, then it’s imperative that you always save receipts.  These receipts are best kept well organized in a file system or in envelopes. 

Although you are without the benefit of having a 401K matching plan from an employer, it is still smart to save money for retirement and create your own retirement plan.  Another great benefit to self-employment is that you get a bigger tax deduction from saving for retirement verses being employed for someone else. 

Always stay on top of your finances during the year, and not only when tax time arrives.  When you examining your expenses continuously, it is easier to spot ways to reduce costs and maximize profit.  Likewise, when you examine your income, you might discover a way to increase revenue.  By watching both income and expenses, you will find yourself more profitable than if you had tried to operate without them as guiding tools.