4 Tax Saving Tips for the Self-Employed
The IRS defines self-employment tax as a social security and Medicare tax to be paid by persons who work for themselves. The IRS considers an individual as self-employed if he operates a business or trade as an independent contractor or sole proprietor, or if he is a partner in a business, or if he is business for himself in any other way. The following is a list of some key self employment tax tips to help you pay your taxes efficiently while availing the maximum tax benefits.
1. Separate Business Income from Other Income
It is important to classify your various incomes properly when computing your income from self-employment. The best way is to maintain a separate record for all your business income throughout the year. If you are receiving payments from customers, you may request them to send you the Form 1099-MISC (miscellaneous income) which will give you a precise record of payments received in the previous year. You should be aware that your customers will send a copy of 1099 to the IRS.
So your reported income must be equivalent to or greater than the total of what is reported on 1099 forms from your customers. If your reported income is lesser than that, you could get a notice for tax audit from the IRS. Therefore, even if your customers did not send you Form 1099, it is crucial to report all your business income for the year. So you should maintain a careful record of all your business income received during the year.
2. Report all Business Expenses to Minimize Tax
One of the important self employment tax tips is that you must report every business related expense in order to reduce your tax burden legitimately. Even if you are using business cards or paying annual charges for a business website and domain name, you should include such expenses in your business expenses for the year. If you have taken business insurance, the premiums should also be included as a business expense.
If you have bought a computer or other business related equipment on loan, the interest costs on such loan should also be included in your annual expenses. If you are running your business from home, but using your car and telephone for business purposes, you can include the maintenance costs and running expenses of these items in your business expenses.
3. Include Medical Insurance as an Expense
As a self employed individual, you may be paying for your own medical insurance. This makes you eligible to get full deduction of your medical insurance premium as per U.S. tax law. However, the condition is that your business should be making a net profit in order to qualify for this deduction. If the business is making a net loss, the insurance premium cannot be shown as a business expense.
4. Claim Expenses for Home Office
If you are operating your self-employed business from home, you have a right to treat the portion of the house that is being used for business as your office. This is one of the best advantages for a self-employed person to claim personal or home expenses pertaining to business use. However, this claim is applicable only if the business is making a net profit. At the most, this expense can be used to make the net profit zero. But it cannot be used to create a net loss.
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