Being your own boss can feel freeing and powerful. However, with great power comes great responsibility, especially when it comes to taxes. Taking care of all business aspects on your own means you should be prepared to handle all the financial work that comes with the new adventure. Here’s a brief tax guide for the self-employed.
Get Financially Organized
There’s nothing worse than scrambling for income and expenses during tax time. Staying organized throughout the year can save you time and money. You’ll want to maintain accurate records including:
Income statements with invoices, receipts, Forms 1099, etc.
Purchase invoices
Receipts for travel, transportation, entertainment, and gifts that are business-related
A breakdown of your assets, including purchase price, cost of improvements, depreciation deductions, etc.
Employment tax records
Know Your Responsibilities
You are already responsible for the success of your business. However, you also need to know your financial responsibilities to maintain your business. This includes paying self-employment taxes and quarterly estimated tax payments. If you earned $400 or more in 2022, you need to pay self-employment taxes. The current rate for self-employment tax is 15.3% of your net earnings, which consists of social security and Medicare tax. The good news is that since in a typical job, the employer is responsible for paying half of this tax, you’ll be able to deduct 50% of your self-employment tax during tax time.
Unfortunately, you won’t have an employer to withhold tax from your self-employed income. That said, you’ll need to make estimated tax payments by each quarterly deadline:
April 18, 2023
June 15, 2023
September 15, 2023
January 16, 2024
You should make estimated tax payments if you expect to owe more than $1,000 in federal taxes for the year. If you do not make these payments, you could face underpayment penalties.
Take Advantage of Tax Deductions
As a business owner, you have the benefit of writing off expenses that most employees cannot, as long as they are ordinary and necessary for business operations. You can write off advertising costs, supplies, legal fees, repairs, vehicle expenses, business travel and entertainment, and even more if you operate your business from home. If you aren’t eligible to participate in your spouse’s workplace health plan, you can typically pay for your own health insurance and deduct your premiums.
Those who have a business loan or business insurance can also deduct the loan interest and insurance premiums. If you only take advantage of one deduction as a business owner, you should consider the one for self-employed retirement plan contributions to an SEP-IRA, SIMPLE IRA, or 401(k). These accounts can reduce your tax bill at tax time and help you accrue tax-deferred investments gains in the future. Be sure to look into all tax deductions available so your taxable income is reduced.
Tax Help for the Self-Employed
Running a business, whether small or large, has immense opportunities for financial success. However, all of that hard work and prosperity can be taken away if you do not file your taxes correctly. In the worst-case scenario, owing the IRS taxes and not being able to pay can result in a tax lien, which can shut down your business. If this is your first year as a business owner, start off right by knowing your tax responsibilities. If you’ve had your business a while but need tax help now, we can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here, we will continue to review some of the most common life transitions that can affect your taxes.
Buying or Selling a Home
There are several tax benefits to becoming a homeowner. For example, homeowners can deduct expenses like mortgage interest, real estate taxes, mortgage points, and insurance premiums. In addition to these deductions, new homeowners can also take advantage of penalty-free IRA withdrawals used to pay for the down payment on their home purchase.
On the other hand, selling a home can mean turning profit, especially in a seller’s market. However, homeowners should stay mindful of capital gains taxes. Single filers who sell their home after owning and living in the house for at least two of the last five years before a sale can avoid paying taxes on the first $250,000 of profit from the sale. Married couples filing jointly in the same scenario can avoid paying taxes on the first $500,000 of the profit from the sale. Any excess profit will be subject to capital gains taxes, which can be a hefty and unplanned expense.
Accepting an Inheritance
If you receive an inheritance a loved one passes, you might wonder if any of it is taxable. In general, money inherited is not taxable. If you receive property, things are a little more complicated. You will receive the home at its fair market value determined on the date of inheritance. If you sell the property for more than the fair market value, you’ll be taxed on those gains only. If you inherit an IRA account, the rules of taxation vary depending on your relationship to the original account owner. Generally, you’ll likely be taxed on any distributions taken from the account.
Retiring
If you currently save for retirement, you might already know that you are eligible for certain tax breaks, like deducting contributions to your 401(k) or traditional IRA accounts. On the other hand, when it comes to taking distributions on these accounts, you will have to pay income tax on your withdrawals each year. You will not owe taxes on Roth IRA withdrawals since your contributions were made with after-tax dollars.
Dealing With Taxes After Death
Many taxpayers are unaware that after death, one final tax return will need to be filed in your name. If you’re married, your spouse will be able to file a joint return one last time. Your spouse, or other named representative, may even need to file an estate tax return, which summarizes the assets of the deceased.
Tax Help for All Life Transitions
You may not be at an age to begin worrying about how these life transitions could affect your taxes. However, being unprepared is what can lead to financial mishaps. So again, plan for the year ahead so you are not blindsided by a large tax bill in the future. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here are some of the most common life transitions that can affect your taxes.
Getting Married
While a wedding will bring many types of joy, newlyweds can also celebrate new tax breaks. Once you are married, you and your spouse will have the benefit of filing jointly. This filing status can offer lower tax rates and a higher standard deduction. Married couples filing jointly also have extra tax perks to look forward to. For example, if you are not working, you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses.
Having a Baby
Having a baby, or growing your family in other ways, can significantly reduce your tax liability. Claiming dependents can grant access to new tax credits and deductions. The Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Credit, Adoption Credit, the Credit for Other Dependents, and higher education credits are just a few examples of credits available for those who can claim dependents.
Education Expenses
If you have recently decided to go back to school, or if you have a dependent who will be attending college soon, you might be able to take advantage of some education-related tax breaks. There are tax credits available to students to help offset qualifying expenses. Credits like the American Opportunity Credit and the Lifetime Leaning Credit can help. If you have already graduated and are now paying student loans, you can deduct up to $2,500 of your student loan interest during tax time.
Moving Out of State
Sometimes new opportunities come from out-of-state and moving states can affect your tax bill. Aside from moving expenses, you’ll need to figure out if you’ll be paying less or more taxes in your new state of residency. States like California and New York have much higher tax rates compared to others. Some states do not have any income tax. It’s important to factor this into your budget before you decide to make the big move.
Accepting a Promotion at Work
After properly celebrating a job well done, you might want to consider how your new role at work can affect your taxes. A bump in pay can also bump you up into a higher tax bracket, which means more taxes owed. For most, the tradeoff is worth it, but either way you should do the math to be prepared for tax season. To help offset any additional costs during tax time, you can also adjust your W-4 withholding.
Tax Help for All Life Transitions
The best thing you can do is prepare for the aftermath of each of these changes. Plan for the year ahead so you are not blindsided by a large tax bill next filing season. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Now that IRS enforcement is picking back up, some taxpayers are seeing that the IRS has placed their overdue tax account with a private collection agency (PCA). CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on what collection agencies you can trust, how PCAs will notify you of your tax balance and what you can do to resolve your tax burden.
IRS enforcement has cooled in the years following the COVID-19 pandemic, but the 2022 Inflation Reduction Act is equipping the agency with over $45 billion for tax enforcement. With high interest rates in place, now is an even worse time to owe the IRS. Here is an overview of back taxes and how to get rid of them.
What are back taxes?
Back taxes are unpaid taxes from a previous year. For example, if you had a tax bill of $1,000 after filing your 2021 tax return and did not pay it, you owe back taxes. Not only would you owe the $1,000, but you would also owe any penalties and interest that accrued on this tax bill. You can owe taxes by not reporting all earned income, not filing a return, or filing but failing to pay your tax bill.
What happens if I don’t pay back taxes?
Unpaid taxes will result in an IRS notice, which is a formal letter from the IRS. Typically, the notice will advise the taxpayer to pay the balance owed within 21 days. If the balance is still unpaid within 60 days, the IRS will likely proceed with collections. While the IRS is awaiting payment, the tax balance will accrue interest and penalties.
How do I get rid of back taxes?
If you do find yourself in the unfortunate situation of owing the IRS, there are some options for how to pay your back taxes. If you cannot afford to pay, you still have options. It’s important to know that there are always options and the worst thing you can do is ignore the issue.
Pay your taxes
This is the most straight-forward solution to getting rid of back taxes. If you can afford to pay off your tax balance, you should do it immediately to avoid additional penalties and interest. IRS interest rates are high right now, making your tax bill more expensive than it would’ve been in previous years. You can pay your tax bill with a credit or debit card through your online IRS account, by phone or even on the IRS mobile app. If you don’t have enough to cover the balance, you can request a short 120-day extension with the IRS. This option doesn’t stop interest or penalty fees, but it will allow more time to pay the tax debt in full. Even borrowing from your retirement fund or taking out a personal loan might be a better option than allowing your tax balance to grow.
Request an Installment Agreement
You can request an installment agreement, or a monthly payment plan, with the IRS. With this option, the 0.5% monthly penalty will be reduced to 0.25% until the balance is paid off. Interest will continue to accrue until the balance is paid. If you cannot pay your back taxes within 120 days and you owe less than $50,000, this might be the best option for you. Taxpayers should note if they do not pay according to the IRS’s set schedule, they can void the installment agreement and proceed with enforcement.
Apply for an Offer in Compromise
In some cases, the IRS may settle your tax debt for less than the amount you owe with an offer in compromise (OIC). This is understandably the most sought-after option to get rid of back taxes, but it is also rarely approved by the IRS. To qualify, taxpayers need to prove that paying off their tax debt would result in financial hardship according to IRS standards. They also need to be current on all tax returns and cannot be in bankruptcy. Applying requires an application fee, which can be waived if you are a low-income taxpayer and an initial nonrefundable payment. Your debt will also still accrue interest while your application is reviewed.
Tax Help for Taxpayers with Back Taxes
Having unpaid back taxes can cause severe stress and dealing with the IRS on your own can be intimidating and time-consuming. A knowledgeable and experienced tax professional can help you understand your options better and do the heavy lifting when trying to get rid of your back taxes. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
