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2010
By Christopher Freeburn

 

Being self-employed is a dream for many people. Who doesn't want to be his or her own boss? Of course, the downside of being the boss is the all responsibilities that come with the job. Unfortunately, calculating and paying taxes are part of those responsibilities.

 


According to the Internal Revenue Service (IRS), you are considered self-employed "if you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor." The IRS requires self-employed individuals to pay a Self-Employment Tax, which assesses Social Security and Medicare taxes similar to those paid by employees and their firms. The IRS also requires self-employed people to pay quarterly estimated taxes as a substitute for the withholding taxes that are applied against an employed person's salaries. These factors make complying with self-employment taxes rules somewhat more complicated than the rules that apply to the employed.

 


With that in mind, the following are some tax tips for the self-employed:

 


Consult a CPA. Even if you are intent on doing everything yourself, it is better to seek outside help than make a mistake when preparing your taxes. An error on your tax returns can result in escalating fines and penalties from the IRS. Tax law is complicated, particularly when it comes to self-employment. To be certain you are in compliance with all relevant requirements, talk to a certified public accountant and review your situation. A CPA will be familiar with the federal, state and local tax laws that apply to you. Additionally, a CPA may be able to point out tax liabilities and deductions that you hadn't considered.

 


Keep good records. Good recordkeeping is more than simply a good business practice; it is a necessity when it comes to dealing with the IRS, which may demand to see every last detail of your income and expenses, particularly when you claim deductions on your tax return. If you are ever audited--and being self-employed makes that more likely, especially if you run a heavily cash-based business--you will need to have every receipt and document to support your claims. Otherwise, fines and penalties will accrue. Get in the habit of saving everything, and develop a filing system that allows you to retrieve needed documents quickly.

 


Medical Insurance - Self-employed people can deduct up to 100% of medical insurance premiums paid for medical insurance for themselves, spouses or dependents. Medical insurance costs are deducted directly from total income.

 


Deduct all business expenses. Every drop of toner you buy for your printers, reams of paper, shipping expenses, business meals, postage, software, pens and pads, and anything else used or contributing toward your business is an expense that can be deducted. Be sure to save every receipt to back up your claimed deduction. Also be sure that you can justify the claim that the items or services purchased were used directly for your business. (Again, a well-documented journal or daily record of these expenses is particularly helpful when it comes to claiming entertainment expenses like meals.) Also, don't forget that since you're self-employed and pay both the employer and employee portions of Social Security tax, you can eventually deduct half of these self-employment tax payments on your 1040 (line 27).

 


Increase expenses to lower taxable income. As the end of the year approaches, you can increase you deductions against that year's income by making business purchases before Jan. 1. Need another printer, or PC? Better desk or cushy new office chair? Buying it before the end of the calendar year means whatever you spend can be deducted against that year's income taxes. And this past year, 2009, was a particularly good year to invest in your business since the federal government significantly increased the amount of bonus depreciation and Section 179 deductions immediately available (up to 50% of total cost and $250,000, respectively).

 


Contribute to Your Retirement. The options for self-employed people to save for retirement have never been better. If you haven't created a retirement plan for yourself, now is a good time. All payments made to a retirement plan-solo 401(k), KEOGH, or SEP plan--are deductible against the current year's income (except, it should be noted, payments to Roth IRAs). Also remember that retirement plans have different contribution limits. Local banks or financial institutions will be able to help create and maintain your preferred retirement vehicle.

 


Strongly consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.
When should my small business hire a bookkeeper or accountant?

By Reed Richardson

 

Every company, whether it's a part-time, home-based sole proprietorship or a multinational Fortune 500 corporation, shares something with all the others: a need to manage the money coming in and out of its coffers. For entrepreneurs, this responsibility, like many others, often falls upon their own shoulders. But being one's own bookkeeper or tax preparer is, at best, a temporary or stopgap solution, and, at worst, a recipe for entrepreneurial disaster. For a sense of how can your business can avoid the latter and recognize when the former has run its course, read on.

Early signs that its time to relinquish the bookkeeping reins

Many entrepreneurs launch their businesses with little thought put toward who will keep their financial books or file their taxes. With the plethora of relatively straightforward, plug-and-play software-based financial and accounting tools currently available, they just assume they can and will perform the task themselves. But too often, these same entrepreneurs can end up struggling or even failing because their best accounting intentions don't match up with reality. It's estimated that the average small business owner who does his or her own books spends 10 hours a week on the task; someone has to ‘plug' in all that financial data, after all, before the accounting software can ‘play' it. So, before you launch a start-up or even if you're in the early stages of running your own business, you might ask yourself the following questions as a self-assessment to see if an early bookkeeping intervention could prevent problems down the road.

-Do I feel confident I can establish a coherent, comprehensive and easily expandable bookkeeping system on my own?
-Am I going to be diligent enough about following up and maintaining my bookkeeping system for it to be work?
-Are my financial management skills strong enough to ensure that my business won't miss growth opportunities?
-Will the time I must devote to bookkeeping adversely affect my business's long-term prospects for success?
-Can I stay sufficiently versed on financial disclosure rules and tax law changes to avoid legal troubles or costly audits?

If you find yourself answering ‘no' or even ‘not sure' to most of these questions, it might be wise to investigate using a professional bookkeeper from the outset of your new business.

Bookkeepers-more affordable alternative to accountants

For entrepreneurs in the earliest start-up stages, money is often tight and the hourly rate of a Certified Public Accountant might quickly empty the cash register. As an alternative, very small businesses looking for day-to-day or week-to-week managing of their finances should consider a bookkeeper instead. Bookkeepers are just that, professionals who specialize in managing balance sheets, cash flow and the like, but who haven't received all the formal education necessary to become accountants.

Typically, bookkeepers charge a lesser fee-often two or three times lower than a accountant-and can be available part-time, criteria that make them doubly attractive to small companies with limited funds and less complicated financial ledgers that are looking to outsource the task. However, just because a bookkeeper lacks a C.P.A. degree doesn't mean that he or she can't fulfill the role of business advisor as well, providing financial and tax savings tips in addition to their normal day-to-day administrative functions. To achieve this, however, it's key to search for professionally certified bookkeepers that have current or previous experience working with similarly sized small businesses (and preferably, in similar industries).

 

The best resource for finding a bookkeeper is usually through word-of-mouth, but be forewarned, hiring a bookkeeper or accountant means making this individual privy to lots of confidential information about your business and personal life. As a result, it might be wise to steer away from the potentially awkward dilemmas or serious conflicts of interest created by having a bookkeeper who is a close family friend or who has one of your direct competitors as a client.

 

To start your search for a certified bookkeeper, try visiting the American Institute of Professional Bookkeepers home page (http://www.aipbjobs.com/). And to download a free practice test for use in evaluating potential bookkeeping candidates, check out the AIPB's hiring page (http://www.aipb.org/testrequest.php).

For established small businesses: when to upgrade to an accountant

If your small business is growing and looking to move beyond the start-up stage, it might be a good time to review your bookkeeping practices to see if hiring an outside accountant, or even bringing in one full-time, better fits your new circumstances. This can be particularly important if you foresee your business moving to a more complex organizational structure, like incorporation, or if you intend to seek out venture capital investment. Scenarios such as these can easily overwhelm the standard accounting software and may even prove too much work for, say, a part-time bookkeeper, who also doubles as your company's office manager. To determine if the expertise of a C.P.A is now the safer bet, consider the questions below.

-Am I anticipating significant growth in staff and/or revenue in the near future?
-Will this growth result in drastically different financial and tax circumstances with regard to payroll and employee benefits?
-Will my company be incorporating, looking to add equity partners, or start issuing ownership shares anytime soon?
-Is my current bookkeeping system capable of handling a large injection of capital, either through debt financing (business loan) or equity funding (venture capital)?
-Can my bookkeeping scale up to handle more complex billing and cash flow issues?
-Do I have in place a financial plan for my eventual retirement or exit from the business?

Again, it you can't answer affirmatively to many of these questions, your small business might be ready to enlist the services of a C.P.A.

Accountants: financial expertise, net positive ROI

Stable, profitable small businesses that are looking to take that next big step are prime candidates to hire a C.P.A. And with their advanced financial and tax training, accountants can often fulfill the invaluable role of business and financial advisor in addition to managing a smaller company's balance sheet. While even an established entrepreneur may balk at a C.P.A.'s higher hourly fees or market-rate salary, these costs are often quickly recouped through the tax savings and increased revenues that they can provide.

Many accountants boast of different sub-specialties, such as Personal Financial Specialists (PFS) or Certified Information Technology Professional (CITP), so it's important to consider additional needs of your business when looking for a C.P.A. But just as it is with bookkeepers, the right accountant for your company will match your personality and business philosophy as much he or she meets your training and previous client experience expectations. There are a number of online resources you can use to locate a C.P.A.

 

(http://www.aicpa.org/Consumer+Information/Find+a+CPA/, http://www.cpadirectory.com/, and http://www.nsacct.org/professional.asp). And for a more detailed, step-by-step guide to hiring a C.P.A., check out this article at CPAdirectory.com (http://www.cpadirectory.com/professionalresources/details.cfm?id=257&pageid=161.)

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