Getting Ready for Tax Season as a Self-Employed Taxpayer
Senior Accountant
It is important to start thinking about tax season, especially for self-employed individuals. By starting your tax return prep early, you’ll experience a smooth and stress-free filing. In this blog, I share some steps to help self-employed individuals prepare for tax season.
Keep Records Organized
Keeping your records organized is something you should be doing year-round. Keep personal and business expenses separate and ideally keep separate accounts and credit cards. It may even be helpful to convert paper files into an electronic format to keep them all in one safe place and easy to share with your tax preparer. There’s software on the market that’s specifically meant to store receipts and assist you in tracking expenses. We can help you find the best software/electronic document management system for your purposes and processes.
Estimate Tax Obligations
It’s important to know what tax obligations you have. Self-employed individuals are obligated to pay 15.3% self-employment tax to cover Social Security and Medicare taxes. This tax is in addition to state and federal taxes.
Self-employed individuals should pay estimated taxes quarterly. Paying quarterly estimates reduces the amount you have to pay at any one time, and will reduce or eliminate any penalties or interest you might owe at the end of the year. The payment amount will vary based on your projected income and expenses.
Check Out Tax Deductions and Credits
There are certain deductions and credits that self-employed individuals can benefit from. It is important to research or ask your tax advisor if there are any that could apply to your situation. Some common examples include:
Home office deduction
Mileage and travel
Health insurance premiums
Contributions to retirement plans
For more information on common tax deductions and credits, check out this blog.
Maintain Cash on Hand for Tax Payments
In order to be able to promptly pay your tax obligations and avoid late fees and penalties, it is important to set aside sufficient funds to cover any liability due at the time of filing. Consider putting aside a percentage of income into a separate account each month to ensure you have the cash on hand when it’s time to pay the final tax balance. We can help you determine a more accurate percentage, but a ballpark range is 25-30% of your business’ net profit.
Consult with an Expert
Consider having a tax expert on your side to help you with planning and navigating the deductions and credits. A tax expert can help you stay organized, understand tax obligations, identify deductions, and estimate your taxes.
Tax season can be overwhelming. The steps above will have you well on your way to your easiest tax filing ever. For more information reach out to any of our tax experts.