Making money as a self-employed individual is exhilarating, but it can also get a bit stressful when tax time hits. To make sure you avoid an audit and negotiate the complicated world of self-employed taxes properly, here are answers to the top 15 questions for self-employed taxes.
- Should I take the home office deduction?
Writing off a portion of your home for business purposes will increase your audit risk. If you decide to take this deduction, you want to make sure the space you write off is used exclusively and regularly for your business.
- Can I write-off my car as a business expense?
Yes, being self-employed gives you the ability to right off the portion of your vehicle used for business purposes. However, you must prove business use through organized record keeping, so consider using a logbook or an electronic tracking device.
- What type of deductions can I take for being self-employed?
Being self-employed typically means you are being paid pre-tax income. At the end of the year, you will need to report this income and pay taxes on it (often times you will receive a 1099-MISC tax form). To help offset some of this bill and to ease the burden of other typical home business expenses, you can take tax deductions. Here are 15 common self-employed tax deductions.
- How many years can I go without earning a profit on my home business?
If a business reports a net profit in at least three out of five years, it is assumed to be a for-profit business. However, if the business reports a net loss in more than two out of the five years in operation, it is assumed to be a not-for-profit hobby business. Continual business losses (meaning you write-off more than you make), leaves you are at higher risk of receiving an IRS audit.
- Do I need receipts for all my write-offs?
Yes. Keeping receipts for all expenses and deductions is important because the burden of proof rests with you if audited.
- How much self-employment income can I receive without having to report it?
None. The IRS requires you to report ALL of your income, even if you do not receive a 1099-MISC tax form.
- Should I hire an accountant to help me with my home business taxes?
Not necessarily. It is up to you to decide whether or not to seek outside help as you prepare your personal and business taxes. If you have little experience preparing your business taxes, it may be a wise investment to seek out help for the first year or two.
- What are the top audit flags for a sole-proprietor business?
Home Office Write-off
Meals, Travel, Entertainment
Writing Off a Vehicle
Consecutive Years of No Business Profit
Disproportionate Income To Lifestyle
- Do I need to have a federal tax ID number (FEIN) for my home business?
If you are a sole-proprietor without employees or single-member LLC without employees, you don’t need an FEIN -- you can use your social security number. Any other business set-up does require an FEIN.
- A client is asking me to fill out a W-9 Form for tax purposes, why?
The W-9 Form is the official IRS form used by a company when they want you to send them your taxpayer identification number (either your social security number or FEIN). Most often, a W-9 From is sent to independent contractors, consultants, and other self-employed workers. This form helps the company properly fill out a 1099-MISC tax form.
- Does a home business always have to pay taxes at the end of the year?
Not always, but saving some cash for tax time is always a wise idea. Self-employed individuals are required to pay any personal income tax and self-employment tax due at the end of the year. This burden can be lessened with various tax deductions.
- What is Self-Employment Tax and is this in addition to the regular taxes I will pay at the end of the year?
Yes it is different. Self-employment tax is a tax you will need to pay on top of any other taxes you may owe. It is the self-employed individual’s very own version of FICA tax, which is usually paid by employers for Social Security and Medicare. It is due on your net earnings from self-employment.
- Can I write off my health insurance payments?
If you are self-employed, pay for your own health insurance and have a net business profit, you are able to deduct the full cost of your health insurance premiums as a personal deduction. If you breakeven in your business or experience a loss, you are able to still deduct your health insurance premiums as a medical expense on a different area of your tax form.
- What is the likelihood that I will get audited?
Based on figures from 2011, of those making less than $200,000, only 1% can expect an audit. Obviously, your chances to be that 1% is much greater if your return raises an audit red flag (see questions #8).
- What can I expect if I get audited?
Only 25% of IRS audits actually involve a face-to-face meeting, the other 75% are mail audits. Once audited, more than 80% of individuals end up paying additional taxes.
Disclaimer: I am not a tax specialist or licensed tax attorney. The information provided here should be used as a general guide. For specific questions about your own taxes, please consult a tax specialist or refer to the official IRS publications.