Tax Tips for the Self-Employed
By: Angela Stringfellow
If youíre self-employed, tax management is probably one of your biggest headaches. Itís complicated, confusing and frustrating, to say the least. Itís also one of the biggest barriers to starting your own consulting or independent contracting business. Many people hesitate to take this step simply because they are so intimidated by the complex tax management systems that have to be in place to stay out of trouble with the IRS. Here are a few tips to help keep your freelance business organized and make the process a little less daunting. Once you have a good system in place, itís easier to maintain and you can enjoy the many perks associated with self-employment.
1. Keep Good Records. This is essential in the event of an audit, but also for your tax preparer and yourself. Make your tax preparerís job a little easier by keeping good records and trying to keep them fairly organized, and make your own job a little easier for those times when you have to look back in your records for an old invoice or to determine what work youíve previously done for a client.
2. Take Your Eligible Deductions. Donít forget about childcare deductions and home office deductions, if applicable. Your home office space is deductible if it is used solely, exclusively and regularly for your business, and you do not have an outside location that you use to conduct business activities. Calculate the percentage of square footage that your office space takes up in your home, and you can deduct that same percentage of your mortgage payment. In addition, you can now use that figure to deduct the same percentages off of your other bills, such as your electric bill, phone bill and internet bill.
3. Set Aside Estimated Tax Payments. If youíre getting paid as an independent contractor on a 1099 basis, no one is withholding taxes from your checks; youíre responsible to set that aside for Uncle Sam on your own. Make sure you plan carefully for quarterly taxes, and avoid needless late fees or penalties from the IRS.
4. Donít Neglect Saving for Retirement. Itís easy to forget when the payroll clerk isnít automatically taking it out of your paycheck for you, pre-tax. Consider setting up a SEP or Keogh plan for retirement. Remember also that you may be missing out on employer contributions, since youíre no longer working for a company, so you may want to consider contributing a little extra to make up for that.
5. Deduct Business Expenses. Remember to keep track of all those little things that you use to conduct business so that you can deduct them on your Schedule C at tax time. Did you send out a mailer recently? Keep your receipt for those stamps. Did you purchase new office equipment, a desk, paper, envelopes, or a special software program? A receipt and an explanation of the itemís business purpose is all you need. Get in the habit of making sure you get receipts for all those purchases, and keep them organized in a safe place. All those little things can add up to significant savings at tax time.
6. Get Organized. This can be the biggest challenge for some people, and while not related exclusively to tax management, it will serve you well in this and all areas of your business if you develop a solid client management system. Experiment with different types of software programs that can help, or develop a file folder system. If you use your computer to keep your records and files, donít forget to back it up regularly. Your computer, no matter how state-of-the-art, can go completely kaput in the blink of an eye. Iíve seen it happen to many.
7. Use Your Resources. Many organizations exist to help the self-employed manage their businesses better. One organization that can really help to simplify the tax management process is MBO Partners, which acts as an employer of record yet still provides all the freedom and perks associated with running your own business. Donít be afraid to utilize the resources that are available to make running your business easier, less time consuming, and less frustrating.
Angela Stringfellow is a marketing communications consultant and an MBO Partners associate. Visit their website, MBO Partners.
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