A lot of us fancy having our own business. The idea of being your own boss is quite a strong motivating factor. But there is no denying the fact that you have to take care of most of the factors in self-employment. Here are the top 10 tax related question for self-employed individuals along with their answers.
Can I avail home office deductions?
Self-employed individuals usually skip out this part with the fear of increasing their chances of being audited. However, more than 50% of businesses run from an office at home. So, you need your bother yourself with any probabilities of audit as long as you are following the ground rules. The space that you use exclusively for your business requirements is only eligible for any write offs.
Can I deduct auto expenses?
Yes, you can. All expenses that are necessary and ordinary when it comes to business usage can be used for tax deductions. It is essential that you keep track of mileage and ensure you separate out own usage versus business needs.
What are the deductions applicable to me?
When you are self-employed, it is a bit more complicated to do your taxes. However, there are a lot of potential areas that you can opt for deductions that you could not do with your normal job. Essentially you can deduct any expenses that help you to run your business smoothly. Expenses such as marketing, internet bills, business related travels etc. can be deducted.
Is there a limit up to which I do not have to declare my self-employment earnings?
As per IRS you need to declare any income, irrespective of how small it might be out of self-employment. Thus, you need to report any and all of your sources of income, so that you do not attract any unwanted attention. If you sell services or products directly, it is a bit difficult to manage things. Thus, it is advisable to keep a track of all the earnings and report it.
Should I submit receipts for any write-offs?
You do not have to submit any receipts for write-offs unless explicitly called for. The safest option is to keep receipts of all expenses with you in a folder. It would allow you to file your taxes more effectively and submit the same if needed.
Is it necessary to hire an accountant for taxes?
No. It is not necessary to hire an accountant to do the taxes for self-employed. However, it largely depends on you, if you wish to take such services or not. Individuals, who had some experience with business taxes, can do it on their own with a little bit of research. But if you are not very confident about it, hiring an accountant might not be a bad idea.
What are the chances of me being audited?
Individuals making less than $25000 a year have 1% chance of being audited. While there is a 2% chance of being audited if the income is between $25000 and $100,000. If you make more than that, there is a little more than 2% chance.
What about health insurance premiums?
If you’re in business and you pay for your own health insurance premiums, you can deduct it as medical expenses.
Should I fill up the W-9 Form, as asked by a client?
If a company wants you to provide them with either your FEIN or social security number, they will ask you to fill out the W-9 Form. The Form which is for self-employed and independent contractors is similar to W-2 Form.
Do I need FEIN (Federal Tax ID Number)?
For individuals who are sole-proprietor or single-member LLC, they need not have a FEIN as they can use their social security number. Since, it is free to get a FEIN, having it would not hurt anyways.
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