One daunting prospect when it comes to considering self employment is taxation. How best to prepare the correct information, pay the right amount tax and generally satisfy the IRS (Internal Revenue Service) and not fall foul of their rules is a concern for many self employed people.
One primary concern is avoiding paying too much tax; many self employed people are aware of certain expenses that can be claimed – but what are these and how can you ascertain they’re appropriate for your business?
There’s also the need to ensure you’re familiar with the paperwork and forms that you’ll encounter for recording payments from your customers and staff salaries if you employ people.
Five tips to help you keep taxation affairs in order:
1. Knowing what taxes you have to pay
You’ll be aware that the IRS will tax you on business profits, but there are various other taxes that may or may not apply to you depending on your business set up.
For example, depending on what service you provide, or products you sell, and what state you’re based in will determine whether and how you’ll pay sales tax.
Perhaps you’re liable for property tax if you own your own premises or other related buildings used for your business?
An accountant will be able to help you ascertain what taxes apply to you and how to prepare for them accordingly.
2. Understand the self employment tax
This tax is basically constructed to ensure the self employed pay their Social Security and Medicare contributions.
Employed people automatically pay these by way of deductions from their gross salary, but they effectively split the cost with their employer. A self employed person is both employer and employee in this case so is liable for the entire amount – as of 2018 15.3% of eligible income.
This resource explains the full breakdown of this tax and how to calculate it although it’s an area your accountant will help with.
A key to minimizing the tax is to ensure your net income is not higher than it needs to be through claiming the correct business expenses. Indeed, the ‘employer’ part of your self employed taxation is in itself tax deductible.
3. Claiming correct business expenses
You’re likely aware you’re entitled to claim expenses incurred in carrying out business activities, but what vexes many self employed people is what expenses can and cannot be claimed.
A basic rule of thumb is to ask yourself ‘is this expense genuinely related to business?’.
It’s important to keep up to date with what is and isn’t tax deductible, and ensure you’re covering all possibilities: for example, claiming for using part of your home as a workspace if home based.
Again, your accountant can help here; they’ll be familiar with up to date IRS rules regarding expenses.
Various expenses can be claimed including:
– Vehicle use
– Business travel
– Meals (when traveling on business or entertaining)
– Home office
– Internet and phone
– Marketing and advertising costs
– Retirement plan contributions
Further explanations of the above and more expense headings can be found at this resource.
4. Appropriate business structure
Your business structure is important for tax purposes and may need altering if you increase in size or make significant changes.
For example, if you’re self employed in all probability you’ll be trading as a sole proprietor, but if you grow and maybe recruit staff you might consider incorporating as an LLC (Limited Liability Company) or form a partnership. This will impact your tax position so requires careful thought – your accountant can advise.
5. Appoint a trusted accountant
With the references above to how an accountant can help with various taxation affairs, it’s clear you should use the services of one even if you have a simple self employed enterprise.
They can keep you up to date with ever-changing tax rules and legislation, advise on what expenses you can legitimately claim, and help prepare your tax paperwork in good time for the IRS deadlines.
