Being self-employed isn’t always the utopia that employees presumably think it is. For starters, you have to pay for your own vacations, there is nobody who will match your 401(k) contributions, and if you don’t talk to many people when you’re holed up at home, you may consider your houseplants as your co-workers (in which case, you really should get out more often). But the worst part of being self-employed is arguably the time of the year when you file your taxes.
If you’re self-employed and stressing over April 18, 2017, the day everyone needs to have filed by this year, you’ll want to avoid making these mistakes.
[See: 9 Red Flags That Could Trigger a Tax Audit.]
Problems with your paperwork. Some of the most common filing missteps are with the paperwork involving deductions and self-employment tax, says Brian Thompson, a Chicago-based certified public accountant and attorney who specializes in tax planning and preparation.
A common error is reporting business income on Form 1040, line 12, without any corresponding deductions for business expenses, Thompson says.
“Instead, [self-employed] taxpayers should complete Schedule C to Form 1040,” Thompson says. “Schedule C is the schedule used to document the business expenses. Taxpayers should deduct all ordinary and necessary business expenses such as office rent, communications expenses — business internet and phone — professional license fees, malpractice insurance and self-employed health insurance expense.”
As for self-employment tax paperwork, Thompson says a lot of people make the mistake of failing to complete and attach Schedule SE to Form 1040.
“Schedule SE is where a taxpayer reports the deductible part of the self-employment tax, which is also known as the employer match to self-employment tax and is typically 7.65 percent of net income from self-employment,” Thompson says.
[See: 10 Tax Breaks for People Over 50.]
Careful with deductions. If you’re going to trip up on your taxes, it’s probably here, especially with the home office deduction, says Mike Frost, based out of McLean, Virginia, and a senior wealth planning strategist at Wells Fargo Private Bank.
“The home office deduction has always been an area the Internal Revenue Service focuses on during an examination. So the business owner will want to show how the home area is regularly and exclusively used for the business,” he says, adding, “Exclusively used is the requirement that trips most owners.”
Frost says that if you pay your business’s bills from the kitchen table, your kitchen area isn’t now eligible for the home office expense.
“If an area is not exclusively used for the business, that area cannot be included in the home office expense calculation,” Frost says.
There are also other deductions that can blow up in your face if you were, say, audited.
“I see often where the entire amount of a cellphone bill will be claimed — or the entire amount of their internet at their personal residence where their office is,” says Amanda Kendall, the president and founder of True Resolve Tax Professionals, based out of Denver.
When Kendall has challenged clients about that in the past, “the most common response is, ‘I couldn’t run my business without the internet or my cellphone.’ In these cases I ask them if they had the internet and their cellphone before they became self-employed. I also ask them if they ever get on the internet at their home for personal reasons or call a family member on their cellphone.”
Of course, the answer to both questions is always yes.
“There is a common misconception that because one needs the internet and their cellphone for their business to operate, that they can claim 100 percent of these expenses, but this isn’t going to stand up in an audit,” Kendall says.
So what should you do? Not claim your cellphone or internet? Or claim 50 percent of the expense?
“On the cellphone, 50 percent is the safe method,” Kendall says. “However, most self-employed individuals do use more than 50 percent. I recommend that they use a three-month average.”
Of course, figuring out an accurate average is easy if you pay the same amount on your cellphone every month. Meanwhile, with the internet, Kendall recommends claiming 50 percent.
[See: Answers to 7 Burning Tax Questions.]
Estimated taxes. This is one area of taxes that’s very easy for a self-employed person to bungle, and so very important that you don’t.
When you worked for someone, you had your taxes taken out, and that money went to the IRS. When you’re self-employed, you have to send that money yourself. That can be tough, especially if your revenue stream is shaky. If you have to choose between paying your electric bill and the IRS, the electric company will win every time.
But you need to try to make payments every quarter — generally April 15, June 15, September 15 and January 15 — or you could wind up with a hefty tax bill every time you file.
Of course, if you’re reading this now and slapping yourself on the head for not making those payments last year and last January, this is a series of mistakes you’ve already made, and not something you can really fix when you file. What to do?
If you can make any payments now, do it now, before you file, says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre, New York.
“If you miss a payment date, you may be subject to penalties. The amount you’ll owe is based on how late your payment was, so if you realized your payment is past due, you should pay your outstanding balance for that quarter as soon as you can to avoid even greater charges,” Zimmelman says, adding: “The longer you wait, the greater the cost gets.”
And what if you don’t have the money to make the estimated payments you missed?
“Pay what you can,” Zimmelman advises. “You’ll still be charged a penalty on the amount that was missing, but it will cost you less in fees if you make a partial payment on time than if you make a full payment late.”
And don’t beat yourself up if you forgot about estimated payments — or if you find filing your taxes maddening. Filing taxes when you’re self-employed isn’t easy, and it’s not as if you can ask your houseplant “co-workers” for tax advice. Well, you can. But, again, if you’re doing that, then seriously, you really do need to get out more.
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How to File Your Own Taxes When You’re Self-Employed originally appeared on usnews.com
