Being self-employed gives you the opportunity to work for yourself and control your income. But if you’ve always worked as an employee, becoming an independent contractor or business owner changes the way you complete your taxes.
Before, your employer deducted taxes from your paycheck and paid a portion of your Social Security tax. Those days are over, and you’re now responsible for your own tax bill. Although most self-employed people do owe the IRS at the end of the tax year, understanding various tax breaks can help you get a refund.
Reporting Your Taxes
Single and joint tax filers with no dependents or business deductions can file a 1040 EZ form. This is the simplest tax form to complete, in which many filers are able to file their own taxes. As a self-employed person or an independent contractor, you’ll need to report your gains and losses on a 1040 form. Throughout the year, keep accurate records of your earnings as well as deductible business expenses. Two additional tax forms are associated with the 1040 form. You’ll use a Schedule C to report your business income and expenses, and a Schedule SE to determine your Medicare and Social Security tax. Due to the complicated nature of this particular tax form, hire an accountant to handle your income tax preparation.
Biggest Tax Items
You might put off starting your own business due to tax fears. However, there are several deductions and tax breaks to help lower your tax liability.
1. Self-employment tax deduction. This is an extra tax in addition to your income tax. This is how you pay Medicare and Social Security taxes. For some, this extra tax discourages self-employment. However, the IRS views self-employment tax as a business expense, thus allows self-employed people to deduct half of this expense from their income.
2. Home Office. Regardless of whether you rent or own your house, if a room in your house is used exclusively for business purposes, you can take a home office deduction. Provide your income tax preparer with the square footage of this space and he’ll calculate your deduction. With the home office deduction, you’re also eligible to deduct a percentage of your property taxes, utilities, homeowner’s insurance, mortgage and home maintenance expenses.
3. Health insurance premiums. If you’re not eligible for health insurance through your spouse’s employer, you can deduct the total of all premiums paid for health insurance, dental care and long-term care.
4. Meals and entertainment. If you meet a business associate for a meal, or take a client out to lunch, keep accurate receipts. These are common business entertainment expenses and you’re eligible to deduct 50% of these expenses.
5. Interest on loans and credit cards. Did you take out a business loan to start your business? Do you have a business credit card used exclusively for business expenses? Interest incurred on a business loan or business credit card is tax deductible.
Not familiarizing yourself with eligible tax breaks can result in a higher IRS bill. Speak with a tax professional to learn your options. The ability to reduce your tax liability can take the stress out of self-employment.