There are many advantages to being self-employed. Your work schedule is flexible. There’s no boss looking over your shoulder. You can take on the assignments you wish. But your tax situation is more complicated than it might be if you were earning a salary.
Before you file your tax return this year, especially if self-employment is relatively new to you, take time to understand the tax laws designed to help you maximize savings, avoid penalties and minimize what you must pay to the IRS.
Review these tax tips for the self-employed and check with a tax professional to be sure you are complying with tax rules and taking advantage of all the tax breaks you can:
- Be sure you’ve paid quarterly estimated taxes – Estimated taxes must be paid if you think you’ll owe $1,000 in taxes or more, or if your tax liability was greater than $0 in the prior year, and you could be in for a healthy penalty if you haven’t paid your estimated payments in April, June, September and January. If you operate your business as a corporation, you have to pay quarterly estimated tax if you expect to owe at least $500 in taxes.)
- Claim all your deductions – Self-employed people typically deduct expenses for a dedicated home office, a vehicle used for business purposes, the cost for entertaining clients, any interest on business debt, and the cost for legal and/or tax assistance. Check with your tax advisor about other possible deductions, including the 20 percent deduction that may be available for pass-through income, such as income from sole proprietorship, partnerships, LLCs, S-corporations and rental properties.
- Consider retirement tax breaks – Because self-employed people don’t have access to the 401(k) plans provided by an employer, they may take advantage of retirement options such as a SIMPLE IRA, a SEP-IRA or a solo 401(k) plan. Check into the differences and/or see your tax advisor for specifics.