When an individual works for himself instead of working for an employer and getting a salary paid, they are known as Self-employed. A self-employed individual receives his income by managing profitable operations from a business or trade that he runs directly. As self-employed individuals do not have taxes withdrawn from their income by the employers, they are responsible for their own estimated income tax and self-employment tax, consisting of Medicare taxes and social security taxes. If the income of self-employed individuals reaches to a certain level, then they must make quarterly assessed income tax payments. While there are many advantages of working for yourself, but ultimately there will be more responsibilities. Whether it’s paying additional taxes or thinking about savings for retirement, below here are some of the tax planning tips for every self-employed individual.
- Estimate your business income:To begin with, it is important to understand and obey with central, state and local tax requirements. It’s extremely essential to find where you stand tax-wise, before you start with taking other tax planning steps. The more expenditures an individual makes in a year, he will have more tax deductions. So, unless an individual estimates his business income, tax planning is a presumption.
- Time your income:Mostly, income is taxable when it is available to the individuals. They cannot postpone the income by simply not cashing checks that goes to them, or by informing customers not to pay until the end of the year. Nonetheless, they can time billing near the end of the year for the advantage. And depending on the tax situation, individuals can sell possessions at a gain before or after the end of the year.
- Make the most of medical insurance deductions:Health insurance premiums for the individual, spouse and dependents can be deducted as an adjustment to income. This includes long-term care insurance premiums. The policy can be in the name of the individual for tax deduction, it does not need to be in the business name.
- Time your expenditures:Business assets if bought by 31st December, can be depreciated on the same tax year. The entire cost of the assets can also be taken for tax deduction under Section 179 for the same year. Business expenses are calculated on the same tax year that has been bought, even if the payment is not done until the following year.
- Keeping the company form simple: Always try to hold the Sole Proprietorship unless there is a need for formation of partnership or a corporation for some reason. It is the easiest and simplest way to file for tax deduction.
- Automate your record-keeping:Automatic record keeping not only saves time but also it’s less prone to mistakes. There are many finance software that can be synchronized to bank accounts.
- Take a home office deduction:Portions of home insurance, utilities, rent, etc., can be deducted if an individual have a qualified home office. To make this easier, the Internal Revenue Service has devised the Simplified Home Office Deduction which helps tax payers to avail benefits of small business tax incentives without the stress of lengthy calculations.
- Understand itemized deductions vs. business deductions:Always try to deduct expense or portion of an expense as a business expense, this helps in reducing adjusted gross income and self-employment tax.Overall, there are many advantages to owing a business, but it comes with having more responsibilities and other works. These internal and external tasks can be allotted and advice for specific questions can be asked from qualified accountant rather than paying to IRS or other agencies in the event of any mistakes.