You may not be familiar with the self-employed tax rules if you are filing taxes as a sole proprietor or solo entrepreneur. These are some helpful tips to make sure you get the most from your tax return.
It is important to keep accurate financial records when filing taxes for self-employed individuals. You should also pay self-employment taxes.
This article will discuss the most important considerations entrepreneurs should make during tax season. It will also explain how to file and save taxes correctly.
Tax Guide for Self-Employed Financial Records
It is essential to keep your financial records current, even if you are a sole proprietor. It will make it easier to file your taxes. Your future self will be grateful. In the event that you are audited randomly by the Internal Revenue Service, (IRS), record-keeping is a must.
Before you move forward, ensure that your records are separated into business and personal folders. To avoid misinformation or confusion, you want to keep them separate. To fully isolate your business’s financial transactions, you might consider opening a bank account for business with a debit/credit cards.
You might consider hiring a professional bookkeeper or using a record-keeping service for complex business transactions.
Important Documents to Help You Prepare for Tax Season
What records should you keep? Gross receipts for all purchases and expenses incurred by the business are essential. These expenses can often be deducted, and we’ll get to that later. It is important to keep track of them. This includes travel expenses and transportation to work-related events.
Documents pertaining to assets are the second category of documents you should keep. This includes keeping track of annual loss or gain if you sell assets.
Check out the IRS FAQs for more information about proper record-keeping.
Tips for Self-Employed Tax
There are three things to remember when it comes to filing: self-employment tax, retirement contribution, and deductions.
All entrepreneurs and business owners must pay self-employment taxes according to the IRS. This rate was 15.3% for social security, and 2.9% for Medicare as of 2021.
Self-employment tax is not filed in the traditional manner. It is due quarterly. You can pay online or by phone.
Effective record-keeping will allow you to pay your quarterly taxes throughout the year. You might be eligible to receive a refund for your tax return if you pay more tax season than you calculated.
The IRS will dock you if you fail to make a quarterly payment, or you avoid them entirely. The penalty is 0.5% of you owes and can go up to 25%. Make sure you pay quarterly taxes.
Contributions to retirement for self-employed workers
You can open a retirement account if you are self-employed. You can save money for the future and get tax breaks.
You can create an individual 401k plan for yourself or a simplified employee pension plan (SEP) if you are an independent worker with no employees.
Individual 401(k), allow you up to $19,000.500 in pretax earnings in 2021. SEP IRAs allow for you to contribute as much as 25% or $58,000 depending on your net income.
You can deduct most of the contributions you make to these retirement plans from your income when paying your taxes. This allows you to legally avoid paying taxes on income over $2,000 before retiring.
Deductions for Self-Employed
The most exciting part of the tax guide for solopreneurs is finally here – the deductions. Write-offs, also known as tax deductions, are expenses that you have incurred during the year to support your business. They can be deducted from your income and result in a lower tax bill.
Self-employment taxes are dependent on deductions. You’ll want all the deductions you can.
These are the most popular self-employed deductions:
- Business expenses or standard mileage deductible
- Contributions to retirement
- Premiums for professional, liability or malpractice insurance
- You may also be able to deduct certain personal insurance policies
- Office supplies
- The cost of a home office
- Business cards can be purchased with interest-free credit cards or loans
- Telephone and internet charges (for office use).
- Business meals
- Business travel
- Start-up costs
- Continuing Education
- Memberships and subscriptions for professionals
There are many deductions that can be claimed under the honor system. However, it is important to keep accurate records in the event you are audited.
Our solopreneur tax guide makes it easy to make self-employment tax less daunting. You are already on the right track with meticulous record keeping and accurate quarterly self-employment tax payments. Combine that with retirement contributions, self-employed deductions and you have a season that is manageable with many tax breaks!
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