Being your own boss can feel freeing and powerful, but 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
We know you are already responsible for the success of your business, but 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.
Since you won’t have an employer to withhold tax from your self-employed income, you’ll need to make estimated tax payments by each quarterly deadline:
- April 18, 2023
- June 15, 2023
- September 15, 2023
- January 16, 2024
A good rule of thumb is to make an estimated tax payment 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. If you have a business loan or business insurance, you 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, Optima Tax Relief can help. Contact us for a free consultation with one of our knowledgeable tax professionals.