How many self-employed clients do you have? Chances are good that the number of individuals working for themselves has increased. As a result, it’s good to refresh yourself on issues related to this ever-growing workforce. Here are tips directed to the taxpayer that are also good for you.
Tip #1: Review the resources at this IRS website that are just for self-employed taxpayers. It has helpful information about a variety of topics, including:
- Business structure – Information about Sole Proprietors and Corporations.
- Forms for Self-Employed Individuals.
- Deductions available to Self-Employed taxpayers, such as Automobile and Home Office Deductions.
- Self-Employment Tax Obligations – As a self-employed individual, in addition to regular income tax, you have to pay self-employment tax. This is the equivalent of what you would have withheld for both Medicare and Social Security x 2 (since you have to pay the matching amount that an employer would have to pay).
- How to choose a tax preparer, and more.
Tip #2: Get and keep your records up to date, using software such as QuickBooks®. This will help you manage your business and react with proper planning, as well as help you and your tax professional to estimate the amount of tax you will owe by the due date of the returns.
Tip #3: After estimating your taxes, consider tax planning with the help of your tax professional.
- If you expect to owe a large amount, consider deferring your income by waiting until near the end of the year to invoice your clients/customers. Most self-employed taxpayers pay tax on the cash basis, meaning that you don’t have to report the income until you receive it.
- Pay expenses by mailing checks or paying online before year end to reduce the income from your business. Pay expenses with a credit card this year, and under IRS rules, deduct the expense this year, even though you may not pay the credit card bill until next year.
Tip #4: Take advantage of all deductions you are allowed for your business. They reduce income tax and the self-employment tax (mentioned above).
Automobile deductions for business use: You can deduct actual expenses multiplied by the business use percentage OR take the IRS Standard Deduction. Actual expenses include gas, repairs, maintenance, repairs, insurance, AAA fees, depreciation and other miscellaneous vehicle expenses. Business use percentage is calculated by multiplying the expenses by a fraction; the numerator is the business miles driven for the year and the denominator is the total miles driven for the year. The rate for the IRS Standard Deduction for 2015 is $0.575 per mile. In either case, make sure you keep a good log or calendar of your miles driven for business that includes the destination, business purpose of your trip, who you met with and why, and the date.
Home office used exclusively for business – deduct a portion of your home expenses. The portion is the ratio of the square feet of your office, divided by the livable square feet of your home (the number of square feet a realtor would show on a listing). You can claim a portion of Interest, property taxes, insurance, repairs, maintenance, other direct expenses and utilities. The IRS allows you to claim either this amount or $5 per square foot of office space, whichever is higher.
Meals and entertainment – Keep receipts along with a log of expenses that contains information similar to that of a vehicle. Get a smartphone app to keep track of expenses and mileage.
Depreciation – Claimed for computers and similar equipment purchased for the business. You can only deduct the business portion if the equipment is not used 100 percent for business. You can take upfront depreciation (Sec. 179) instead of writing it off over time.
NOTE: Always do an estimate of next year too. Deferring revenue and accelerating expenses could create a low taxable income this year and a high one next year. That may not be the best plan.
Tip #5: Consider retirement plan alternatives. If you don’t put money away, you don’t have an employer to do it for you. You could consider an IRA to get started, since you can put up to $5,500 in it ($6,500 if age 50 by Dec. 31). You must have net income of this amount, in order to contribute that amount. If you want to contribute more, consider (in this order) a SIMPLE-IRA, SEP-IRA or even a solo 401(k). If you have employees, you may have to cover them also.