For those individuals out there who are self employed, the thought of filing taxes on their own can be very stressful and time consuming. However, with organization and preparation, it can be a lot simpler and hassle free, and most of all, less expensive than seeking the help of an accountant.
Unlike taxpayers who are basic employees and do not have a lot of figures to keep track of during the year prior to filing, self employed persons qualify for many deductions to their income, and therefore it is very important to keep detailed records of their costs and expenses throughout the year. Depending upon what profession they are in, some will qualify for more deductions than others. As a self-employed person, you are required to pay your own taxes, instead of having them deducted from a paycheck.
As far as general instructions, the same rules apply for the self employed and a regular employee. Organization is the key when it comes to having all of your figures totaled when it is time to file a tax return. What is different about being self employed is there is more record keeping which needs to be done during the year in order to put oneself in the best position for as many deductions as possible. Often times, self employed persons end up owing a lot of money to the IRS, because they do not take advantage of as many deductions and expenses to their income as possible.
Since the self employed do not have tax deducted from their pay during the year, it is imperative that they try to offset that income. For an individual with their own business, the IRS Form 1040 Schedule C is what is used to calculate a “Net Profit or Loss” from their business, which the final number will offset the amount of tax that is due from Self-Employment Tax. Such expenses may include, but are not limited to items such as advertising, vehicle expenses for business purposes, insurance paid, professional fees, office expenses, repairs and maintenance, memberships and dues, and phone and Internet expenses. IRS Form 8829, “Expenses For Business Use of Your Home,” can also be used if a self employed person has an actual office that they work from, which is based upon the total square footage of the work space used, compared to the total space of the home itself. For this worksheet, it is very important to keep detailed records and all receipts during the year. The business percentage use of the home is used to calculate the amounts of deductible expenses from the use of that home to maintain the home office.
These expenses include, but are not limited to, mortgage and home insurance paid throughout the year, real estate taxes, repairs and maintenance of the home, utilities paid, and a depreciation allowance. The total figure will also help to offset any Self-Employment Tax due from the taxpayer. Many self employed individuals will end up with a negative figure, or Net Operating Loss. This amount can be elected to “carryover” for upwards of 20 years, which will therefore offset taxes due in the future as well.
Whether a person elects to use tax software such as Turbo Tax Online, or completes their tax forms by hand, it is much easier if the bulk of the work is done throughout the year. Being organized and keeping detailed records is the secret to easy tax preparation and filing; not to mention getting through an audit if the IRS decides to do so.