5 Tax Tips for Self-Employed Individuals in Any Field

Self-employment is like ice cream; it comes in a large variety of flavors. You can be a freelance writer, a graphic designer, a landscaper or a dog walker. Some people are self-employed full time, while others work part-time around their “day job”. Whatever your flavor of self-employment is, there are some definite tax tips you need to know.

If You Earn It, You Have to Declare It

If you do work for businesses, they will generally send you a 1099 form that you have to file at the end of the year. However, even if you work for individuals, or a business that does not send you a 1099 form, you still have to declare that income. Do not be fooled by thinking, “If I make less than $600 from one person (or business) during the year then I don’t have to declare it.” That is an often-misunderstood concept. The IRS expects you to declare every penny you earn.

Track Your Income and Expenses

You do not want to hand your accountant envelopes full of unsorted receipts and cashed checks come tax season. The accountant may miss some deductions because he or she could not find the right slip of paper. Even relatively inexpensive programs like Quicken work great. Keep track of all your hard copy paperwork and keep it organized as well. The IRS has very specific rules about business tax deductions and whoever does your tax return will need as clear a picture as possible to maximize your deductions.

Estimate Your Taxes

There are two ways to avoid being hit with a whopping tax debt at the end of the year. Either you have to be frugal enough to put away a certain percentage of every payment you receive, or you have to arrange with the IRS to pay quarterly estimated tax throughout the year. Most people choose the latter in order to avoid yearly penalties for underpayment. It may be tempting to spend all your money as quick as you earn it, but remember that just because no one took taxes out when you earned it, that does not mean you will not have to pay later. Estimating and paying your taxes is one way of avoiding having to file a tax extension form in the future.

Pick Your Name

If you are doing business under your own name, that is great. You just file a Schedule C form with the IRS and life is simple. However, if you are doing business under a company name, then you should have some sort of business license in order to avoid problems with the IRS. It can be a simple DBA (doing business as) license, but you want to make sure that you have all your legal paperwork in order before filing your taxes.

Self-Employment Tax

The IRS does charge a special tax rate for people who are self-employed. You will have to pay the self-employment tax, but you can deduct half of when figuring out your adjusted gross income. Form 1040 Schedule SE, available on the IRS website, will help you figure out exactly how much your self-employment tax will be.

Filing a tax return when you are self-employed is trickier than filing a regular tax return. Many people find that going to a professional tax accountant is well worth the initial fees in order to get the highest possible return they can. Unless you are very knowledgeable about business tax laws, you should keep yourself as organized as possible and seek the help of a reputable professional when it comes time to file your taxes.

About the Author: Annita Grosh is an accountant who specializes in working with self-employed invididuals. She loves watching as an idea becomes a workable and profitable business.

Top 10 Reasons for a Tax Audit

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A tax audit can occur for several different reasons that most people are not aware of.  You will have to comply with at least two of these factors before you have anything to worry about.

The most popular reason for a tax audit is unreported income.  Here, there is a lot of paperwork that must be filled out and completed.  When the paperwork contains errors or does not get turned it at all, issues can start to occur.  This type of paperwork is also time sensitive and should be received in order to file by January 31st.

Improperly prepared tax returns are the second most common reason for a tax audit.  In the event that your tax forms are filled out or filed incorrectly, this will definitely have the IRS breathing down your neck.  In this case, many people decide to round numbers or estimate amounts when it comes to their deductions.  When information is repeatedly misrepresented and estimated, the IRS may view this type of activity as a red flag.

A drastic increase or decrease reported income can raise a few eyebrows within the IRS.  When income amounts fluctuate a great deal, whether it is an increase or decrease, this could insinuate that somewhere along the line, income was not reported.  Taxpayers may also be tempted to hide assets such as bank accounts but in many cases, the IRS can find out.

Income that is not enough to support the individual’s current lifestyle can also become an interest of the IRS.  If you report things, such as a mortgage or other type of tax on property but do not show income that can represent proof of these allegations, this may pose additional issues.

Claiming charitable contributions can also get you into trouble with the IRS.  Some may claim to have given a specific amount but the IRS may look for documentation to prove your contribution.  The IRS provides information on how to properly report charitable contributions.  A safe percentage in this case would be anywhere from 2% to 5%.

If you are claiming business expenses, make sure expenses are business-related.  Many taxpayers have reported expenses that have turned out to be personally related.  Also, keep in mind of purchases made with business funds but have been used for personal reasons.  Be sure to document expenses such as travel and equipment purchases correctly in order to obtain the proper credit.

Andrew writes frequently about personal finance as well as issues effecting both consumers and small businesses, covering everything from credit cards to mortgages to how to setup an umbrella company.

Tax Benefits For Parents

When doing your taxes there are so many things to remember that mostly everyone forgets about tax benefits for parents. You could receive benefits for your kids. Here are some ways to see if you apply.

– As of March 29, 2010 you can reduce premiums you paid for health insurance, but that’s only if you were self employed. If your child is under 27 even if they have never been your dependent you can claim them. Meaning if you have a child you have never claimed and he or she is under the age of 27 by December 31, 2010, then you can make them one of your dependents that’s only if you paid premiums on any health insurance, and you were self employed then you can minus the premiums you paid for it.

– If you have ever been laid off work and had to hire someone like a baby sitter or a nursery and daycare center. If your kid is under 13 years of age you might be able to claim them as one of your dependents. Meaning if you got fired and you have a kid under the age of 13 and you had to hire someone to watch them as you look for work, you could claim them as a dependent.

-The EITC is a program where you could benefit from incomes you have earned from farming, wages, and self-employment. Actually it takes down the wage of tax you owe and can possibly give you a refund. Therefor certain people can get rewards for incomes they have earned.

– When you have children and they have income that comes to them by working they possibly can have to file a tax return.

-Interest from student loans. If you have a kid that is in college and you pay qualified student loans you can reduce the interest you paid.

Before doing your taxes remember to check up on things and make sure if you have kids to research all the benefits available to you. Your tax return will benefit greatly from your knowledge of child tax credits.

Tax Return Mistakes To Avoid

For someone who is getting ready to file their personal income taxes, it is easy for them to be eager about the money that may be coming their way. This can cause someone to make mistakes on their tax forms, and to make mistakes that may end up costing them money, or getting them into trouble. One thing that not everyone wants is a tax audit, and this can often be caused by improperly filed taxes. There are many different things that you will want to remember when filing your 2010 taxes, to avoid an audit or additional problems after you submit your return.

The first is to make sure that you claim every single source of income that you have. This can be many different things that you do not think of, such as babysitting, garage sales, having a roommate, or if you do any freelance work on the side of your regular job. You will also want to have all documentation and paperwork for these different things, so there is no confusion when you need to provide documentation. People also make mistakes when they calculate their tax forms, so to avoid any hassles you want to double and triple check all of your calculations.

Other things that may catch the attention of the IRS is when someone tries to claim their own home as their personal office, or for other business purposes. There are limitations to the amount of money that you can write off for your own personal business, so you want to look into all of them before you file your 2010 tax return. You never want to be audited by the IRS, especially if you have done something wrong, because there are severe consequences. Double-check your work, and your documentations, to avoid and 2010 tax return mistakes.