Tax time can be extra taxing for the self-employed. What really do you count as income? What can you deduct as expenses? And why do you have to pay self-employment tax? Here are a few tax tips to help you prepare your self-employed tax return.
1. What is Self-Employment Income?
Self employment income can be any income that you earn as an independent contractor, a freelancer, or even money that comes in from a hobby. You don’t need to make much to be considered self-employed by the IRS.
2. What Business Expenses Can You Deduct?
The good news is that you can deduct any expenses that you incur to create income. Many people have expenses for items that are used for both business and personal, such as computers and internet costs. In those cases the IRS allows you to take a prorated amount as a deduction. Keep a log showing how much is business use, and how much is personal use to come up with your prorated deduction amount.
3. What is Self-Employment Tax?
When you work for someone else as an employee you have social security taxes deducted from your paycheck. Your employer pays an additional amount. When you are self-employed you pay both parts yourself as self-employment tax.
4. How Do You Report Self-Employment Income?
If you are not a corporation or a partnership you will report your self employment income and expenses on Schedule C. It is filed at the end of the year with your Form 1040. However, taxes are due through out the year. Estimated taxes are paid with form 1040-ES.
5. Where Can I Find More Information on Taxes and Self-Employment?
The IRS has many great resources to help self-employed people with their taxes. Start with these links from the IRS.
Last year I wrote a post called 101 Tax Deductions for Your Online Business. I was looking it over today, and thought I would point out a few of my favorites.
#10. Business related webinars and seminar fees. This is one of my all time favorite deductions, because I love to travel, and I love to be able to write off my travel. As long as the main purpose of your trip is business, and you spend the majority of your time in business related activities, you can write off all your travel expenses. So for example if your business is web design, and you go to a seminar for web designers where you can meet vendors, potential clients, and learn more about the latest advance in web design, you can write off your airline tickets, hotel fees, and 50% of your meals. Just make sure you have a real business purpose for the trip.
#58 – 66 Start up and organizational costs. Until you actually open your virtual doors and are “in business” you can’t deduct the expenses you incur while getting your business started. However, once the business is started you can take your start up and organization costs, and amortize them over “not less than 60 months”. With amortization, you don’t get to deduct all your expenses at once, but you do get to take a portion each year for 5 years. This can be to your advantage, because you will be deducting expenses in later years, when you will probably be making more money.
#98-101. Qualified Home Office. Sometimes thought of as an audit flag, a qualified home office done right is a great tax deduction. If you have a place in your home that is used regularly and exclusively for business, you can write off a portion of your mortgage, rent, utilities and home improvements. Just make sure you follow all the rules carefully and you will have a great tax deduction that will stand up to an auditor.
What are your favorite tax deductions for online businesses? What are the strangest things you have heard of people deducting for their business?