Running your own business can be very satisfying and rewarding; and with the emergence of the “Gig Economy,” more of you are moving from being an employee and receiving a W-2 to being self-employed. Whether you have a side hustle or own a small business, today’s post should help with managing the tax and income-reporting process.
What do you do, when do you do it and how frequently must you do it? How do you know if you are compliant, and what kind of planning can you do ahead of time? These are all valid questions for newly self-employed taxpayers, and here are some answers:
1. Keep detailed/accurate records and don’t mix your personal and business expenses – Taxpayers can get into trouble when they don’t have accurate records and they don’t have proof of their expenses. If the IRS denies expenses in an audit, it is the taxpayer’s responsibility to prove that the expenses are legitimate and deductible. Whether it be substantiating business expenses or a receipt from a charity for your personal tax return, you should maintain accurate and organized records.
2. Don’t fall behind with entering and reconciling your accounts – If you wait until the end of the year to do your accounting, you may miss expenses and you can’t do the proper planning for your business.
3. Know what taxes you and your business will have – Federal, State and Local Income Taxes, Self-Employment Tax, Payroll Taxes, State and Local Business Taxes and Sales Taxes are common taxes that business owners will have. If you have employees and if you conduct business in different states, you and your business may be subject to additional taxes.
4. File and pay your taxes timely – As a self-employed business owner (sole proprietor), you file Schedule C with your 1040. Net income from your business will be subject to Federal Income Tax, and Self-Employment Tax. Although your tax return is due in April (or October if you get an extension), you should make estimated payments (Federal and State, if applicable) each quarter during the year to avoid penalties and interest.
5. Tax planning should be a part of your business planning - Self-employed business owners can benefit from many tax deductions, including depreciation on business assets (Section 179 and Bonus depreciation), Self-Employed Health Insurance, Home Office deduction, Qualified Business Income (QBI) deduction and self-employed retirement contributions. Knowing what deductions are available to business owners will reduce your taxable income and help you to pay less tax.
6. Consider using a Tax/Accounting Professional – besides preparing and filing your taxes, tax professionals can provide valuable advice to help you and your business to be tax efficient and lower your tax bill. Also, if you don’t have internal personnel, you may want to hire a bookkeeper to help your business.
Hopefully these tips will help you and your business prosper for many years to come. The Tax Warriors® at Drucker & Scaccetti have decades of experience helping families and their businesses with tax and financial planning. Call on us; we are always prepared to help.