June 24, 2014



Being your own boss. Calling your own shots. Making your own quarterly payments to cover your income taxes, other obligations. Tax preparation is a necessary evil for nearly everyone who earns an income, but for the self employed, the task can be particularly challenging.

Tax Preparation Tips For The Self Employed

By following a few prudent tips, you can minimize the hassle of tax preparation, leaving you more time to pursue your business and career aspirations.

1. Determine If You Are Truly Self Employed

The IRS has established three categories that determine whether workers are independent contractors or employees: behavioral, financial and nature of relationship. In general, if you provide services for more than one client, choose when and where you work and cover your own costs for equipment, you are an independent contractor. If that isn’t the case for you, perhaps you are not truly self employed. Some companies misclassify workers as contractors to avoid providing benefits and to dodge other obligations. If you believe that you have been misclassified as a contractor, file Form SS-8 with the IRS to obtain a definitive determination of your status.

2. Adjust Exemptions from Wage Income to Reduce Quarterly Payments

Making quarterly estimated income tax payments is one of the more strenuous chores imposed on self employed workers. But if you work for an employer either part-time or full-time while working for yourself, you can reduce the amount of your quarterly income tax payments. If done right, you might be able to nix this chore altogether. Adjust your exemptions so that sufficient taxes are deducted from your wages to cover what you would otherwise pay in estimated installments.

3. Consult Your Previous Year’s Tax Return for Guidance

Failure to pay enough in quarterly estimated payments can result in significant tax penalties. Your previous year’s tax returns can help you generate an estimate for what you should pay in quarterly estimated installments. The IRS is also fairly lenient with taxpayers who make honest miscalculations.

There is no underpayment penalty if your unpaid tax obligation totals $1,000 after your estimated payments are accounted for. There’s also no penalty if your estimated payments total at least 90 percent of your current year’s tax obligations or 100 percent of your previous year’s tax obligations, whichever is smaller.

4. Don’t Forget Local Taxes and Fees

Many municipalities impose taxes and licensing fees on self employed workers and small business owners. This is especially likely if your business generates foot traffic or if you provide tangible goods to your clients. Check out local municipal and county ordinances to avoid missing critical payments.

5. Consider Whether Incorporating Your Business Makes Sense

For many entrepreneurs, operating as sole proprietors is the most viable option for conducting business. Sole proprietors file regular Form 1040 income taxes, reporting their business expenses on Schedule C as an attachment. But corporations are taxed at a lower rate than individuals, and they enjoy separate legal status. This would shield your personal assets against adverse legal and financial consequences related to business activities. On the other hand, forming a corporation or limited liability company (LLC) is more complex and expensive than operating as a sole proprietorship.

Consulting with a tax professional can help you make the right determination for your business.

6. Maintain Accurate Records for Business-Related Expenditures

The equipment and supplies that you purchase for your business represent legitimate tax deductions. You can write off unpaid invoices if you can demonstrate that you have suffered adverse consequences and have made good faith efforts to collect what is owed to you. Business-related travel and entertainment also represent legitimate tax write-offs. But you must be able to document your expenses by retaining your receipts and maintaining accurate business and financial records.

7. Don’t Be Spooked by Audit Fears

You may have read or heard that certain deductions such as the home office deduction represent red flags for the IRS that trigger audits. As a result, you may shy away from claiming such tax credits and deductions. While the wish to avoid an audit is understandable, it is foolish to forego legitimate tax deductions and credits. Even if the IRS does request further documentation or even a full tax audit, as long as you can verify your claim, you have nothing to worry about.

8. Claim Health Insurance Deductions and Credits

Under the Affordable Care Act, individuals and households with incomes between 100 percent and 400 percent of the federal poverty rate are eligible to get tax credits when they buy eligible individual health insurance coverage through state or federal exchanges. These credits can be applied directly to insurance premiums if claimed when filing federal income tax returns. Self employed individuals may also deduct 100 percent of the premiums that they pay for health insurance coverage for themselves, their spouses and dependents.

The four following conditions must apply:

  1. You have net profit on Schedule C, Schedule C-EZ or Schedule F for Form 1040
  2. You recorded net earnings from a partnership on Schedule K-1 for Form 1065
  3. You figured net self employment earnings on Schedule SE by an alternate method
  4. You have a W-2 for an S corporation where you hold more than 2 percent shares

9. Don’t Neglect Depreciation

If your business invests in expensive equipment, depreciation can represent a significant area for tax breaks. The IRS allows you to write off part of the value of big ticket items like photocopy machines or a new laptop each year to amortize the upfront costs of such major tools. The IRS.gov website includes instructions on how to properly calculate depreciation. Many commercial tax preparation programs also allow you to include depreciation along with other business-related items on your return.

10. Need Help? Tax Preparation Costs are Tax Deductible

Many self employed individuals outsource their tax preparation tasks to an accountant. If you are among that number, you may be able to deduct the cost of tax preparation as a business expense. The experts at Optima Tax Relief can relieve you of the burden of preparing your tax returns, along with answering your tax-related questions.

If you’ve been around the “self-employment tax” block a few times, you probably recall telling yourself that next year, you’ll do better. You’ll save all the receipts, track all the mileage, put away money for retirement. Well, next year is right now. Check out these mid-year tax strategies for more ways to prepare for next year’s tax season.