Most taxpayers are employees who get a paycheck every pay period and can for the most part ignore their taxes until the end of the year. Their employers are responsible to withhold taxes from their paychecks and they get a W-2 at the end of the year. But if you are a freelancer or are self-employed, you alone are responsible for paying your taxes.
If you are self-employed and don’t have a comprehensive understanding of what to do when it comes to taxes, you are much more likely to find yourself dealing with the IRS collection division. There are over 14 million American taxpayers currently in the IRS collection division. Below are six simple tips to help you reduce your tax liability and keep you out of tax trouble.
If you are already in trouble with the IRS, be sure to consult a tax professional to discuss your unique situation. You are not alone, but you need to take action before the IRS starts to levy your bank accounts or seize your property. You can use this link to schedule a free consultation to find out if we can help you get out of tax trouble: Free Consultation.
On to the tax tips for self-employed taxpayers and freelancers:
Distinguish between your business and personal expenses.
The IRS considers most business-related expenses as legitimate write-offs. But if you claim excessive amounts, you may become at risk for an audit. For example, you can include office furniture or office supplies in your tax deductions for your home office, but you definitely cannot claim that new sofa in your living room as an expense deduction. Also, you should have a separate bank account for your business to pay all of your business expenses.
Claim expense deductions for business-related expenses and keep good records.
If you purchased a new laptop for your business, you can report that as a tax deduction. If you’re using your cellphone primarily for communicating with business clients, you can claim a deduction for that as well. The deduction may be limited to the percentage of time it is used for business purposes. If you can prove with documents that your write-offs are legitimate and can demonstrate the percentage of phone or laptop use that was for business purposes, you can include these deductions on your tax return. Make sure to keep strict and detailed records in case the IRS wants proof later on.
Make Estimated Tax Payments.
Your taxes are generally withheld from each paycheck if you are an employee but not if you are self-employed. So, you can end up with a large tax bill at the end of the year that you cannot pay. To prevent this problem, the IRS requires self-employed taxpayers to estimate the tax they will owe and make quarterly payments so that by the end of the year they will have paid their taxes. Details on making these estimated tax payments may be found in IRS Publication 505, Tax Withholding and Estimated Tax.
Increase your expenses at year’s end.
If you have been planning to get a new printer or a new ergonomic chair for your home office, do so in the last quarter. This way, you can include the purchase as a tax deduction for the year. You can also pay your monthly bills that are not due until January in December. By deducting these expenses, you will reduce your income and your tax liability for the year. Set yourself a prompt to remind yourself of this tip later this year.
Monitor and track your use of your car, phone, and other utilities.
It is often highly impractical to get a separate car, Internet subscription, electricity, or even a separate phone for your home-based business. What you should do instead is to keep track of how much you use these items for business-related purposes. How many minutes are spent on business calls? How many miles do you drive for business trips? You can use an app on your smartphone to track your business telephone calls and another app to track your business miles (you can also use an old-fashioned mileage log). With the proper documentation you can include these expenses as tax deductions and not have to worry about an IRS audit.
Have a qualified tax professional on your side.
There are a lot of variables when it comes to taxes. As a small business owner, having someone to turn to when you have questions is absolutely essential. You should focus on growing your business and doing what you love.
If you’re already in tax trouble and you need an experienced tax resolution provider who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem. You can schedule your free consultation here: Free Consultation.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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