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Hire an accountant:
You could attempt to calculate your liabilities owed to each of the respective jurisdictions on your own. A better choice would be to hire a professional so you don’t miss out on taking all of the appropriate deductions that you are entitled to. It would help to choose an accountant that specializes in your line of business, since they would be able to provide you with a benchmark for your industry. They will also help ensure that your silent partners don’t get more than they deserve!
Don’t try this at home:
Tax returns should definitely not be a Do It Yourself (DIY) activity. Sure, anyone can type numbers into a tax return. But, not everyone knows how to apply correctly for earned income credits, education credits, and teacher deductions to name just a few. And there are no clear instructions for when to apply kiddie tax rates, or what the kiddie tax even is, for that matter! The average taxpayer would also not know when to claim head of household filing status and gain a more favorable tax bracket.
They also may not know what job related out of pocket expenses are deductible, when moving expenses are deductible, or when an IRA distribution is not subject to penalties. This is just the tip of the iceberg of our mammoth tax code, and not knowing the rules can result in thousands of tax dollars being overpaid to the government, and not staying in your pocket! So, unless you’re a single person over the age of 24 who is renting with no dependents and not in school, please seek out a tax professional to prepare your tax return.
For those DIYs choosing to ignore this tip, I will list some other tax tips to consider when preparing your tax return.
Don’t miss out on home expenses
Now that you’re self-employed and your only office is your apartment or a portion of your house, you are entitled to a business deduction for a portion of the expenses paid to maintain your workspace.
Financial tip: Keep track of all money spent maintaining your home, including, but not limited to, utilities, maintenance, and rent.
Don’t run out and incorporate
If you’re newly self-employed, don’t jump to the conclusion that forming a corporation is the way to go. If you work in New Jersey, for example, and your business receives over a million dollars in revenue, as a corporation you would owe $2,000 to the state. (If your business made nothing, you would still owe the state $500!). In addition, you would be required to set yourself up as an employee, where you would pay approximately $1,500 into an unemployment fund that you would never be eligible to collect from. Different states have different minimums—know these costs before you take the leap and form a corporation.
Financial tip: Consult an attorney to help determine if it would be best to incorporate or form a Limited Liability Company.
This week: Basic Bookkeeping Principles
Set up a separate bank account for your business
Don’t mix your business income and expenses with your personal accounts. You want to make it as easy as possible to track what’s going on in your business, and you don’t want to open up your personal assets to government review.
Financial tip: Get pre-printed checks that interface with Quickbooks software. This enables you to automatically record your bills paid in Quickbooks, which saves time…and time is money.
Develop a system to track business expenses paid in cash
Otherwise, you could end up overpaying your tax obligations. If you lose paper receipts and forget to record cash spent, you risk not accounting for all of your business deductions.
Financial tip: Create a folder that you put your cash receipts in. At least once a month, prepare an expense report summarizing your cash payments. If you’re not sure how to set it up, you can buy pre-printed forms at an office supply store. Then write a check (using Quickbooks) for the total amount spent, and record each expense appropriately.
2 #TaxTips for the self-employed this week as we head towards 4/15/10!
2. You’re an adult now
When you work as an employee, the company for which you work withholds all required taxes due, and remits them to the appropriate government agency on your behalf. Now that you’re self-employed, you are required to make these payments quarterly on your own. This is where you see first-hand what it means to truly pay taxes in this country!
3. Get organized
Though acting as a bookkeeper can be quite stifling to your right brain creativity, if you don’t accurately track your business income and expenses properly, you may not be able to feed your creative side. Not to mention, your silent partners from #1 (IRS) like proof that they are getting their fair share
Tax Tip #1
You can’t keep every dime you make
The biggest mistake that a self-employed person can make is to forget that you have some interested, silent partners. These partners consist of the IRS, the state government where you live, the state government where you earn your income, and possibly the local town and/or county that you work and/or reside in, as well. All of these municipalities have a vested interest in your business. Until all your expenses are calculated it’s hard to figure how much you owe. As a rule of thumb for someone starting out assume a federal tax rate of 20%, about 13% for social security taxes (both are paid with your 1040 return) and 7% for state and local taxes. If you don’t share your profits with these interested partners, they won’t stay silent for long!
Financial tip: Put 40% of every dollar you earn into a separate bank account, which you will need to pay your taxes. This will help you to keep your silent partners silent!