If you are self-employed, you probably already know that its a fantastic way to get ahead financially. You also have the freedom to be your own boss and make decisions regarding your business operations, clients and work schedule. However, you also probably know that filing taxes as a self-employed individual is much more difficult. Whether you are a freelance writer, consultant or independent contractor, there are a few things that you should be aware of in order to avoid setting off red flags to the Internal Revenue Service (IRS).
You should first know you will need to organize all of your freelance and independent income from other types. Make sure you report all income, especially on Form 1990s since these are given to the IRS. Track all business expenses. This means any legal expenses, advertising, repairs, supplies or anything else that you need to operate your business or provide your services.
For example, if you have business cards printed or a website developed to promote your business or consulting services, make sure to keep a record of those invoices and work orders. Next, make sure that if you work out of your home, you fill out Form 8829 to calculate how much of your home is used for business purposes.
Set aside money throughout the year to pay money on your personal income from self-employment. You will typically be paying more than if you were employed through a company because an employer will pay part of your Social Security and Medicare taxes. Unfortunately, as a self-employed individual, you will be left with the burden of paying both sides of these taxes.
Your business or service should make a profit three out of every five years to be considered a legitimate business deserving of write-offs according to the IRS. Otherwise, you have the burden of proof that your business is viable. If you run into problems with your taxes or have to go through an audit, make sure you get someone to represent you who fully understands self-employment taxes.