Tax Tips for the Self Employed

A few years ago, I would hire an accountant to do my taxes.  This started when I was in the corporate world and didn’t feel that I had the time to do my own taxes.  Then I discovered that managing my taxes was more effective by planning all-year round rather than a flurry of frantic activity in April.  Now I do my own taxes and have to file for being self-employed.  However, a few steps have made the process less onerous.

--Maintain receipts organized during the year — rather than carefully cataloguing every expense as they occur (which would drive me crazy), I’ve come upon a relatively good happy medium where I classify expenses into 5 major categories: office expenses, travel, health care, automobile, and home office; and keep them in separate folders.  At year end, it becomes easy to total the expenses per category.  In particular, I find that office supplies and postage tend to be tracked poorly if I don’t keep all of the receipts together.

–Keep all business expenses on one credit card if possible — try a credit card that provides a year end summary for you (many do) that helps to reconcile the spending.

--Familiarize yourself with some of the big provisions for the self-employed at the start of the year — for example, health insurance premiums are deductible for the self-employed, contributions to an IRA, as well as office expenses, however, there are restrictions on these amounts.  I find that being generally familiar with the deductibility of certain items helps in tax planning throughout the year. Fortunately, this means that financial planning and taxes become easier in subsequent years.

--Take the deductions allowable, provided you fall within the definition of legitimate business expense — I know of two people who have said to me that they do not take the home office deduction, despite having an office used 100% as a home business, because they have read that this increases the likelihood of an audit.  Provided that you meet the conditions, and maintain documentation, this is a legitimate expense.

–Set aside a reasonable amount of gross earnings and pay quarterly estimated taxes — Quarterly estimated taxes are required if you have significant self-employment income.  One of the problems many newly self-employed encounter is forgetting to set aside sufficient funds for taxes, leaving them in a lurch when payment time comes.  Keep in mind that you will play social security and medicare taxes for both the employer and employee (FICA) as well as Federal and state taxes, if you are self employed.  Fortunately, FICA for 2011 and 2012 is at a lower rate than previous and 1/2 of self-employment taxes can be deducted against your Federal income.

shared at Works for Me Wednesday and Frugal Friday