Starting your own business is exciting, but it can lead to headaches at tax time. Even if you’ve done your own taxes for years, a new business means new forms, new records and new taxes.
If you are an independent contractor or run your own business, there are a few basic things to know when it comes to your federal tax return. Here are six tips you should know about income from self-employment:
Self-employment income can include income you received for part-time work. This is in addition to income from your regular job. You should report everything you received, including tips, whether or not you received a tax form.
Income from self-employment is reported on Schedule C or Schedule C-EZ with your Form 1040.
Self-employment tax must be figured on any profit. Wait, what? I have to pay extra tax because I’m self-employed?
When you work for an employer, the employer withholds social security and medicare tax, matches them, and sends it in. When you are self-employed, you still need to pay into social security and medicare, but you have to pay both shares yourself. Figure the tax on Schedule SE.
You may need to make estimated tax payments. When you are not having tax withheld from your paycheck, you need to send in your own payments so you don’t owe too much money at tax time. You may be charged a penalty if you do not pay enough taxes throughout the year.
You can deduct some expenses you paid to run your trade or business. You can deduct most business expenses in full, but some must be ’capitalized.’ This means you can deduct a portion of the expense each year over a period of years.
You can deduct business costs only if they are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
At Tax Partners Northwest, we specialize in helping small business owners with their bookkeeping and taxes. We’d love to help you too! Give us a call or send us an email to schedule an appointment.