Being your boss can be exciting and possibly a little frightening. Once you choose to strike out on your own, you have a lot to consider. While many freelancers or sole proprietors build their business plan, managing taxes should be considered in the plan’s financial portion. While it is recommended that you employ a specialist to handle your taxes no matter what type of business owner you are, it is still good to know how taxes are handled for the sole proprietor. Here are five tax tips for a business that has a sole proprietor.
Understand the Forms
Because the business’s net revenue is taxable, you will need to become comfortable with a Schedule C form. It is the form where sole proprietors report income and expenses. If your business earns under a specific amount, you may file a Schedule C-EZ and check with the IRS for the current minimum income. You will also need to obtain a Schedule SE to calculate the self-employment tax appropriately. If doing your taxes, you will need to know these forms and study their instructions. Even if you hire a tax pro, your familiarity with these forms will make the job easier for you both.
If you don’t hire a professional and decide to do it yourself, make sure you have the best tax software specifically designed for the freelancer or sole proprietor. This is not the time to wing it.
Organize Your income and Expenses
Being self-employed usually means your income is inconsistent, so estimate your tax liability during the year to avoid surprises. Unfortunately, if you’re audited, the burden is put upon the one being audited to prove the income and expenses on the audited tax return. If you are organized in your receipts and bookkeeping, this should be easy to get through. An audit is not always triggered by something the taxpayer did incorrectly, some audits are random, and if you are organized, you will not need to worry. This organization will make your taxes easy to prepare, whether you give them to a professional or prepare them yourself using tax prep software.
Know the 1099 Form
If a client pays you more than $600, they must send you a 1099 and send a 1099 to the IRS. You need to ensure you include it with your tax preparation data. Even if the client does not pay you more than $600 or doesn’t file a 1099, you are still expected to report all income you make as a freelancer or sole proprietor. These tax mistakes are often caught years after the error is made, and the IRS not only expects you to pay the amount you should have but also charge interest. It is best if you claim income and pay taxes on it when it is due to avoid issues with the IRS down the line.
Claim car Expenses
Even if you don’t primarily use your car for your business, there are times you can write off car expenses. If you drive to any business-related meetings or errands, you should keep an accounting of gas and mileage. You can also write off some of the car repairs if they become necessary. Check the IRS website to find out how many cents per mile you can write off for business-related car use. You must keep detailed mileage accounts for business about car use to get the most out of this valuable deduction.
You can also deduct your actual car expenses, such as depreciation, licenses, gas, oil, insurance, registration fees, repairs, and tires. The car expense deduction generally is based on the total miles driven for business. If leasing your vehicle, you should check with the IRS and determine if your lease payments can be deducted.
Home office Deductions
If you work from home or use part of it in your business, you can deduct some of your mortgage or rent and insurance, utilities, repairs, and similar expenses. You can calculate your home office deductions in one of two ways. First, figure what percentage of square footage you use exclusively for business activities. That percentage of your home-related expenses becomes deductible. So if your office is 10 percent of your home’s square footage, 10 percent of your rent, utilities, and other home expenses for the year may be deductible. If any repairs occur within the office area of your home, those repairs are often fully deductible.
The second way to figure home office deductions is to deduct $5 per square foot for business, up to 300 square feet. You keep fewer records but generally get a smaller deduction, so calculate things both ways before filing. Consult the IRS website for details or the latest changes in deduction amounts.
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