I Lowered My Tax Obligation
If you have been self-employed in the last year and you are now out on the road to tax time, it is better to look for a better solution to the tax season. An incredible 92% of Americans today do not prepare their own income taxes, and it is easy to understand why when you see how many software programs are available to help you in this task.
The problem with these programs is that they are designed to do the tax returns that they sell and market to people in your tax bracket, and they cannot be customized to fit your individual circumstances.
Software that is purchased from major vendors may cost hundreds of dollars and may not do much more than completing the worksheets that you can do on your own using simple calculators and pencil and paper.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Do Some Bookkeeping
If you are like most people, you would have already lost your tax receipts or filed for an extension for your taxes by this time of the year. In reality, there is only a very slim chance that you will ever get the full refund that you expect at the end. As such, it is important to start preparing for your taxes sooner rather than later. The first step in that process is to sit down and calculate your income.
Quite honestly, it is the only way for you to get a clear picture of where your tax liability is going to be. You can then deduct certain expenses from the income to reduce your taxes. This allows you to reduce your taxable income to make it easier for you to meet your tax liabilities.
It is also important to start putting away some money right away. That is because the IRS charges interest on the balance paid in taxes that is not timely paid. With the current interest rate being at historically low levels, it is only a matter of time before the interest charges go up. This is something that you would not want to be caught off guard by.
Self-Employed Business Deductions
Being self-employed is great! You have the ability to take control of your future and design it to align with everything you believe is necessary for long-term success. You call the shots and reap the profits from your work.
You are also responsible for both generating the income and paying the taxes. A lot of self-employed people do not have a formal office, so they tend to overlook using specific self-employed deductions or write-offs when filing their taxes. But the government allows self-employed individuals to deduct certain expenses from their gross income in order to offset the amount of taxes they owe.
Here are a few expenses you can deduct, but you must be able to document them:
- Office Supplies
Once you get used to using deductions to lower your tax liability, you will begin to see the benefits of being self-employed.
Review Your Business Structure
Are you self-employed? Meaning do you run a small company, like a small business but do not have an employer? If so, do you know what type of business you have?
The type of business you have will affect what deductions you are allowed.
An S-corporation is a corporation (that is a separate and distinct entity for state and federal tax purposes) that elects to include the income or losses of the corporation on the owner’s income tax return.
In essence, the corporation is treated as a pass-through entity; therefore, the income and losses of the business get passed through to the shareholders. Any shareholder with the corporation can take a legitimate self-employment deduction on his or her own tax return (as long as the shareholder materially participates in the business).
An LLC taxed as a partnership will generally be taxed as a partnership.
Active or passive losses are lost, but passive losses may be carried over to future years.
On the other hand, an LLC taxed as a corporation will be taxed as a separate corporation.
An LLC taxed as a corporation (or Subchapter S subsidiary) will be eligible for the Section 179 expensing election (subject to certain limitations and restrictions), a dividend received deduction, and a foreign tax credit.
Pay Yourself a Regular Salary
If you are in business for yourself, chances are that you’re not self-employed. That means that the paycheck you earn performing services for a specific client (or clients) is likely to be regular income, tax-free because the money was earned performing specific services. No deductions are allowed.
However, if instead of charging by the hour or by the job, you invoice clients a flat amount or a set weekly or monthly fee, you are a contractor and you must pay self-employment tax (the equivalent of social security and Medicare taxes) and income tax on the amount you invoice.
On the plus side, however, the income you receive must be reported and you can now deduct some of your expenses.
The key is to invoice enough money to cover your expenses. In some cases, you may bill a flat amount or charge by the job as well as deducting expenses, so that you net less than the amount on the invoice. But to do this in most cases you must have a contract that specifies what rates or charges you will be paid and that you cannot vary from this amount.
Deductible expenses include expenses that you would charge a client or that are specific to your business. They do not include expenses that you would pay regardless of whether you were working, such as your mortgage payment. Fringe benefits are another category that is not deductible.
Don’t Mess Up on Taxes
How do you feel about taxes?
Do you think taxes are fair? Do you think you pay too much? Do you find yourself dreading the tax season?
If you answered yes to one of these questions, you’re not alone. A lot of people find that they get upset and even angry about taxes.
The truth is, even though you may not like it, you are responsible for paying taxes, and that’s why the April 15th deadline is as meaningful as it is. You have to pay the government what’s due on time in order to avoid bad consequences.
People who don’t pay their taxes in time are subject to penalties and interest, and these can add up quickly.
Ignoring these assessments can also cause your finances to be mishandled and your credit score to be affected. Your taxes are also an indicator of your financial literacy, and whether or not you take them seriously can also affect the way others think of your house finances.
On the positive side, you can use your tax refund to do all kinds of things. You can use it as a downpayment for a new house, you can add it to your savings, you can spend it on something fun like a vacation, or you can even donate it to charity.