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.

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