If you’re one of the many people who work for yourself, whether it be online or off-line you, will want to read this article about how it affects your taxes. Many people, who work from home, work for themselves. People who work alone in their own business are often called sole proprietors, and are considered self-employed.
The term self-employed is not limited to a person who has a business. A self-employed person can be an independent contractor, a consultant, free-lancer, or a business owner. You can work online or off-line, you can do take your business on the road as well as work from home. Many people who work for themselves are often referred to as independent contractors or free-lancers.
Working yourself does have its advantages and disadvantages when it comes to taxes. When your work for yourself, you don’t have any taxes deducted from your pay as compared to a salaried employee. This makes working for yourself financially attractive.
As a self-employed individual you are responsible for your own taxes. This means that you are responsible for maintaining and keeping accurate records of all of your income and expenses. You are responsible for reporting all income from your trade or business.
As an independent contractor you do not receive a Form W-2 at the end of the year. Instead you receive a Form 1099 Misc. This form reflects the amount of money you were paid by a company during the year. If for some reason you don’t receive a Form 1099-Misc, you are still responsible for reporting the income on your tax return, regardless of the amount.
When you work for yourself you are taxed differently from that of a salaried employee. As an independent contractor you file Schedule C, which is a profit and loss statement with your tax return. You are taxed on your net income from your trade, business or profession. Net income is the gross income minus all ordinary and necessary expenses. Being self-employed you pay both federal income tax and self-employment tax.
One of the big advantages of working for yourself are the numerous tax deductions (the ordinary and necessary expenses) you may be entitled to on your tax return. Why are tax deductions so important? Tax deductions reduce your net income which in turn reduces your taxable income. The lower your taxable income is, the less tax you will have to pay.
Some of the tax deductions you may qualify for as a self-employed individual include the following:
• Home Office
• Advertising
• Legal and Professional Fees
• Telephone and Internet
• Insurance
• Travel
• Meals and Entertainment of Clients
• Taxes and Licenses
• Equipment
• Supplies
• Professional Publications
• Other Miscellaneous Expenses
These are just few of tax deductions that you can deduct when you work for yourself. When it comes to doing your taxes, I strongly suggest that have your tax returns done by a competent tax professional. Having worked in the tax preparation business for over 20 years, I can’t tell you how many times clients fail to account for numerous deductions. This is why you should seek competent tax advise.
One of the disadvantages of working for yourself is the amount of record keeping required. The IRS requires that you keep and maintain accurate records of your income and expenses. The IRS scrutinizes the tax returns of independent contractors and home businesses more than those of salaried employees. Should the IRS decide to examine your tax return, it is up to you to be able to provide the necessary documentation to verify your all information on your tax return.
As a self-employed person, you are required to pay your taxes as you go during the year. You are required to make estimated tax payments on a quarterly basis throughout the year. When it comes time to prepare and file your tax return, you take credit for those payments on the return. Failure to do this can result in you penalized when you file your return.