Today’s sharing economy has created great opportunities for entrepreneurs to start their own small businesses. But perhaps one of the most intimidating factors of creating a start-up is not knowing where to begin with Uncle Sam and paying taxes. Fear not! Here are six tax tips for the self-employed:
1. Don’t wait until the deadline to figure out your expenses.
Keep a detailed daily or weekly log of your business expenses. It will be easier and quicker to prepare your return if you don’t have to shuffle through receipts and identify valid expenditures at the last minute come tax time.
2. Consult an expert.
There’s no shame in hiring a tax accountant. Whether you own a bakery or have a side job in the sharing economy as a dog walker or freelancer, a professional will have better knowledge of deductions and which forms to file. And better yet, employing one will ensure that you’ll have the time and focus to run your business. Filing federal and state taxes and running a business each require significant focus, so don’t sacrifice one for the other.
3. Don’t overlook common deductions
Travel, meals, health insurance and home office breaks are all easy deductions that new business owners often either forget or disregard. Include these in your expense log as you accrue them so you don’t miss out on money you’re entitled to!
4…But be careful when claiming a home office deduction.
This is a valuable deduction, but it is notorious for being an audit red flag. For your home office to qualify, it has to be in a devoted room of the house used exclusively for business. Unfortunately that means if your office is in a guest bedroom or the corner of your living room, it isn’t eligible. Further, be wary of other red flags like large maintenance or utility expenses tied to your home office, and remember that if you rent office space outside the home, you’re not entitled to the deduction.
5. Go green and file electronically.
Not only is it good for the environment, it means you’re putting lot less important paperwork at risk for getting lost or accidentally tossed out. If you make $57,000 or less annually, you could even be eligible for free tax preparation software. These programs complete your tax forms based on a series of questions in which you input your information. If you make more than $57,000 annually, you can still e-file your taxes for free using free fill-in forms.
6. File for an extension if you feel like you might need it.
There’s no penalty for requesting one, and extension requests are almost always approved. Bear in mind, though, that an extension allows you an additional six months to file your taxes, not to pay them. You’ll be required to make an educated estimate of what you owe and pay by the deadline, and either receive a refund from the government for the difference or pay the balance (with a few minor fees).