Today’s sharing economy has created great opportunities for entrepreneurs to start their own small businesses. But perhaps one of the most intimidating factors of creating a start-up is not knowing where to begin with Uncle Sam and paying taxes. Fear not! Here are six tax tips for the self-employed:
1. Don’t wait until the deadline to figure out your expenses.
Keep a detailed daily or weekly log of your business expenses. It will be easier and quicker to prepare your return if you don’t have to shuffle through receipts and identify valid expenditures at the last minute come tax time.
2. Consult an expert.
There’s no shame in hiring a tax accountant. Whether you own a bakery or have a side job in the sharing economy as a dog walker or freelancer, a professional will have better knowledge of deductions and which forms to file. And better yet, employing one will ensure that you’ll have the time and focus to run your business. Filing federal and state taxes and running a business each require significant focus, so don’t sacrifice one for the other.
3. Don’t overlook common deductions.
Travel, meals, health insurance, and home office breaks are all easy deductions that new business owners often either forget or disregard. Include these in your expense log as you accrue them so you don’t miss out on money you’re entitled to!
4. Consider taking the home office deduction if you qualify for it.
This valuable deduction isn’t the huge red flag for tax audits that it was years ago. But your home office must qualify for the deduction. To claim the deduction you have to use a portion of your home regularly and exclusively in your business. In addition, your home must be your principal place of business. You can also qualify for this deduction if your actual work is performed outside your home, but you do administrative and management activities at home because you have no place else to conduct them. See the IRS website or talk to your accountant for more information.
5. Go green and file electronically.
Not only is it good for the environment, it means you’re putting lot less important paperwork at risk for getting lost or accidentally tossed out. If you make $73,000 or less annually, you could be eligible for free tax preparation software through the IRS Free File program. IRS Free File lets you prepare and file your federal income tax online using guided tax preparation, at an IRS partner site. These programs complete your tax forms based on a series of questions in which you input your information. If you make more than $73,000 annually, you can still e-file your taxes for free using free fill-in forms. The IRS Free File applies to your federal taxes only.
6. File for an extension if you feel like you might need it.
There’s no penalty for requesting one, and extension requests are almost always approved. Bear in mind, though, that an extension allows you an additional six months to file your taxes, not to pay them. You’ll be required to make an educated estimate of what you owe and pay by the deadline, and either receive a refund from the government for the difference or pay the balance (with a few minor fees).
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Jeff Watson is a self-proclaimed math nerd. He firmly believes that math is the language of the universe and that by understanding mathematical concepts, we can better understand the world around us. He started DataRangers.org in the hopes of providing resources, games, and web-based calculators to help people of all ages battle their math fears.