Tax time is tough. There’s no question about it. It’s even more challenging, though, when you’re self-employed and trying to deal with the sometimes confusing rules and record keeping that can go hand in hand with running your own show. The Pennsylvania Institute of Certified Public Accountants answers some of the most frequent questions about taxes and self-employment, and offers tips that can help you lower your tax bill.
What qualifies as self-employment income?
Self-employment income is money you earn as an independent contractor or in running your own business. It may include earnings from part-time work, even if you are employed elsewhere in a staff job. Your taxable self-employment income is what’s left after you deduct qualified expenses. If you make $50,000 selling jewelry, for example, and your ordinary and necessary costs of doing business total $21,000, your self-employment income is $29,000. The taxes on that amount will include self-employment tax, which includes your Social Security and Medicare taxes. Be aware that the self-employment tax returned to 15.3 percent in 2013 after being reduced to 13.3 percent through 2012. Since you don’t have an employer withholding your taxes, you generally must pay estimated taxes quarterly.
Retirement savings can minimize taxes
Contributing to a tax-advantaged retirement plan enables you to accomplish two important goals. First, the money you deposit into a qualified plan is a deduction in calculating adjusted gross income, which reduces any income taxes you might owe whether or not you itemize your deductions. Second, it offers you a tax-beneficial way to build up a nest egg for retirement. This is particularly important for self-employed workers who don’t participate in an employer-sponsored plan. Self-employed people or business owners are eligible for several different kinds of tax-advantaged retirement plans, including a one-participant 401(k), a Simplified Employee Pension IRA, or a SIMPLE IRA. Be sure to ask your CPA for more details about retirement savings options and how they lower your tax bill.
Other deductions
If you use part of your home for your business, you can deduct expenses related to that portion of your home. Beginning with your 2013 taxes, you can even use a simplified option that makes it easier to calculate your proper deduction. To qualify for the deduction, the home office must be your principle place of business and it must be used regularly and exclusively for that business. You can also generally deduct any other business-related costs, including office or storage space, supplies and equipment, phone, travel, automobile mileage, advertising, and salaries for any employees or contractors you may use. Expenses for education that relates to your self-employment also may be deductible. Consult your CPA to be sure you’re taking all the deductions for which you qualify.
Make your business more successful
Whether you’re just starting out or considering how to take your business to the next level, there are many tax and business planning considerations that can put you on sound financial footing. Remember that taxes aren’t the only important issue if you’re self-employed or own a small business. Have you considered the possible advantages of a more formal business structure ? LLCs work well for many one-person businesses, and generally don’t complicate your income tax filing requirements.
