The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
Many people have dreams of being self-employed, but you’re different: You actually have a shot at it. You have the start-up capital and a solid business plan that will help make your dream a reality.
But before you take your first step into the world of entrepreneurship, there’s a checklist of things you’ll need to do if you don’t want to get nailed by tax problems while your venture is still in its infancy.
One of the most important decisions you must make as you start your journey toward self-employment is determining what your business structure will be.
Whether your company will be a sole proprietorship, an LLC, a partnership, an S-corporation, or C-corporation will affect how your taxable income flows through to your personal tax return.
Partnerships and Corporations:
Although an LLC is a legal business structure, it is a state-level designation that is not recognized for federal tax purposes. It must file as a corporation, partnership or sole proprietorship.
Now that you know what you are, you can take the steps that can lead to tax deductions down the road. That may first involve securing a tax ID number.
If you can carve out a little nook in your home that you can dedicate solely to your business affairs, you’re setting yourself up for a great home office tax deduction. It does not have to be a separate room, as a desk in the corner of the kitchen will qualify. But it does have to be used exclusively for business tasks, so the kitchen table probably does not qualify.
If you’ve never been a stickler about keeping track of the money you earn and spend, now is the time to make it part of your daily routine.
One of the most common tax deductions self-employed taxpayers can claim is automobile expenses. So don’t fret over the steadily depreciating value of that new van you purchased to make deliveries for your catering business. Several tax options can help you recoup some of the money you spend maintaining and using your car for business-related purposes.
To get the maximum deductions for your business vehicle, you must maintain a written log of business miles. You must also jot down your odometer reading at the beginning and end of each year so you’ll know your total miles.
You may choose to use the standard mileage rates set by the federal government or deduct the actual expenses.
If your car is over 6,000 pounds gross weight, you are not likely subject to the luxury rules and therefore can get a higher deduction for depreciation or your lease payments. All expenses must be ‘ordinary and necessary’ to deduct.
It's not all about the cars, though. A bevy of other deductions are available to the self-employed, such as:
But keep in mind they require meticulous bookkeeping and receipt filing to satisfy IRS rules.
With the freedom of being a self-employed individual comes the sole responsibility for paying taxes.
In addition to income taxes, you may be required to collect and pay sales tax, a state-mandated surcharge that varies from state to state. Business owners should check with their state government to see if they must charge customers sales tax for their products or services.
Individuals may also be held responsible for a use tax, which is applied to all the items a person buys for the business and should have paid sales tax on but didn’t.
Whether you file as a sole proprietor, partnership or a corporation, individuals often have to pay estimated federal and state taxes on profits from the business.
And finally, if you have employees on your payroll, including yourself, they and you are required to pay Uncle Sam the standard payroll taxes on salaries.