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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.