Being self-employed has many rewards; but it also comes with challenges. One such challenge is a more complicated tax situation. Employees get all their deductions taken out before they even get their paycheck, get a W-2, and in most cases, file a simple return that often nets them a sweet little refund.
The self-employed are the ones most likely to get into sticky tax situations, and if there is anyone out there reading this who has racked up a tax bill you can’t quite pay off, it is crucial you take action, rather than delaying simply because you can’t just cut a check for the whole amount. There are companies, like Authority Tax Service, who help you negotiate tax debt. Leverage their expertise to work out favorable terms with the IRS, who are not just going to go away. But, I digress. Back to the topic at hand—here are some of the most common mistake made by the self-employed when tax time comes around.
Not Paying Taxes Quarterly
With a few exceptions, self-employed people are required to pay their taxes quarterly. There are four set dates throughout the year on which these payments are due. Failing to do so can result in penalties. The honest truth is, the IRS does not have the resources to keep tabs on this, and there is a good chance you can pay everything at the end of the year without any sort of repercussion.
But, doing so can be a big mistake if you happen to not have the money. At the very least, it will be a much bigger shock to shell out one lump sum come April 15th. This can be a challenge—it is one thing to already have the money taken out of a standard paycheck, and quite another to receive the whole shebang, and then be responsible for setting aside Uncle Sam’s cut of your own volition. So, even though it may hurt a bit to stick that money in a tax account, you’ll be glad you did.
Not Keeping Track of Expenses
Being self-employed allows you a whole slew of deductions—there are lots of costs to running a business, and you have the right to lower your tax burden by writing off these expenses. But, if you are not keeping good track of your expenses, you may find it difficult to deduct as much as possible for two reasons: First, it is not a good idea to list any write-offs that can’t be properly documented. Second, if you are not keeping track, there is probably a whole bunch of stuff you are forgetting.
If you never get audited, it is not a problem you don’t have the paperwork, but if you do, and any of these expenses are questioned, not having receipts and the like can be very problematic.
Not Taking Deductions to Which You May Be Entitled
Many self-employed people fail to take all the deductions to which they are entitled. This may be due to a number of reasons, most commonly, a lack of knowledge about legitimate deductions, and a fear of being audited. It is understandable to fear the latter, but this will only be a problem for you if you are knowingly being dishonest, and fudging your deductions. If you are entitled to something, don’t hesitate to take it.
The home office can be a biggie, but it can potentially raise red flags with the IRS because there have been many cases of people applying this deduction for a space that clearly did not meet the criteria as set forth by the organization. And for this reason, even people whose space meets this criteria are afraid to take it. But, don’t be.
Some of the most common deductions people miss out on include advertising and promotion, dues, subscriptions, licenses and permits, office supplies, meals and entertainment (up to 50 percent only), travel, auto expenses, electronic equipment and outside services, such as an accountant. Speaking of business accountants , it may be a good idea to get them to help you with your taxes—they will ensure you are taking all proper deductions and that your tax bill is filed correctly.