Self-Employed?

Self-Employed?

Tuesday, 02 April 2019 16:30

Being self-employed creates a lot of tax questions. Two that I see most frequently concern making sure you get all the deductions you’re entitled to and how you pay your tax. I only have enough space here to hit the highlights but hopefully this will help.

Figuring out which deductions are allowed is pretty simple to me (recordkeeping is more complicated). I like to tell clients that if you’re self-employed, any expense that you incur solely because of your business, is deductible. Let’s say you run a small retail store – you know the cost of merchandise, rent, utilities, employee payroll and other directly related expenses are deductible. Things you might forget include trips to the post office or the bank – if you’re going to check the mail for your store, mail a package to a customer, make the daily deposit or pick up change for the Saturday rush, that trip in your car is directly related to your business and the mileage is deductible. If you have a bookkeeper help you part-time, not only is the cost of the bookkeeper deductible, but your trips to their office count too. If you use your personal cell phone to make or receive business calls, part of that bill can be deducted.

Good recordkeeping is one of the most important pieces of advice I can give a small business owner. It’s easy to keep records for those direct business expenses like merchandise purchases, utilities, rent and payroll. What sets the good ones apart is good detailed records for things like business meals, business travel and automobile mileage. If you’re audited, those items are generally at the top of the auditor’s list, so good records can make your life less stressful at tax time and at audit time.

There are lots of free online resources to track these expenses, and most have an app for your smart phone so you can take a picture of the receipt as you pay the bill or automatically track your business mileage using GPS. Get in the habit of documenting every item every time and you won’t have to worry about questions from the IRS – you can pull out your smart phone (which you partially deduct) and show your records.

If you’re self-employed, there are several hands tugging at each dollar of revenue you generate. You have to pay your vendors, your employees, and the taxing authorities all before you get to keep anything. If you’ve been an employee, you know that you get a paycheck that already has taxes withheld – if you have done a good job with your withholding, you get to keep all the money in your paycheck and may even get a tax refund with your return. That’s not how it works for the self-employed. It can be difficult, but you have to calculate how much of your gross revenue is going to be available, after paying all your expenses, to pay your taxes and you. For example, if you have $1,000 in that “bucket”, taxes can account for forty (40) percent or more. My advice is to set that money aside in a “tax” account. Don’t put it in your bank account. You have to be ready to pay your taxes when due, and those payments are due several times throughout the year. Getting behind can make it nearly impossible to catch up

Expense recordkeeping, what expenses are allowed if you’re self-employed, and paying your tax liability are major topics for many taxpayers. I have just hit the highlights here. I hope I have given you some information but for any questions, or more information on your specific situation, please call or email. Many of the taxpayers I see with IRS difficulties are self-employed and I don’t want you to be one of them. Running a business is difficult, but if you start out with good records and a good method of preparing for your tax liability, you will be miles ahead of most small business owners.

At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.

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