Best Way to File Your Taxes if You Are Self-Employed
If you’ve just started a new business, or are planning to open one, you will need to know the best way to file your taxes. The steps that you need to take are not complicated, but some of the detail might be. Whatever you do, don’t put off filing, or for that matter paying quarterly estimates, if required.
The last thing you want, is to end the year with a nice profit, and have a big tax bill for income taxes and self-employment taxes. Like most new business owners, you’ve plowed all that extra cash back in the business, and have none left to pay your taxes.
This is a bad way to start, and you need to decide early on who will be preparing your taxes, and preparing estimates to cover self-employment taxes. If your business is rather simple, and by that we mean, no employees, and operating as a sole proprietorship, you should be able to show your income and expenses on a Schedule C.
To begin with, decide if you will be able to do the following. If not, it might be best, at least for the short term, to hire the services of a competent tax professional.
- Decide who will prepare the annual tax return and e-file it with the IRS and state agency
- Prepare an interim quarterly income statement to see if you have a profit
- Annualize the profit amount & prepare an internal estimated tax return to see if you will have taxes due. If so, & they are over $1,000 for the IRS, you should send in ¼ th of that amount as your quarterly estimate. Pay the state also if there will be taxes due over the amount the state requires.
It really isn’t as hard as it may appear. If you have access to a simple software program, you can make the changes each quarter to make the calculations. If this isn’t something you feel you can do, then by all means, the best way to file your taxes might be contacting a tax professional.
For most individuals though, you should be able to make these calculations fairly easy. You’ll be on the right track, too, when after the end of the year you have your taxes done, you have no additional taxes due.
In general, if your new business is your only source of income, and you are operating as a sole proprietor, you won’t get a W-2 showing income and taxes paid in. That’s the purpose of paying the quarterly estimates, it covers federal income tax and Social Security and Medicare taxes all at once.
Who will prepare your annual tax return?
If you’ve been doing your own taxes, and have some basic knowledge as to how they work, you will probably decide the best way to file your taxes is online at one of the best sites for this. (LINK) When you are operating your own business, there will be deductions you can use to lower your profit.
Our online tax filing program will help you find these expense deductions that you can take during the interview session. If you hire a tax professional to prepare your annual tax return, because of the Schedule C, a self-employed business, the total fee would be $450 and up.
Gather all of your records
Before you even begin to prepare your tax return, you should gather all of the tax forms that you got in the mail. They would include W-2, 1099’s for interest and dividends, 1099’s for your business schedule 1098 for home mortgage and real estate taxes, and any other form that may pertain to your tax return.
Keep in mind, too, if you got any income from someone who didn’t send you a 1099 form, you are still required to report that income too. If you used your personal auto for your business, you need to maintain an automobile record book that shows the date, where & purpose of visit, beginning and ending mileage.
If you have a lot of use for your personal auto, there are software programs available that can be a big help in this area.
There are limits to certain expenses that you may be able to deduct, but our online filing program can help you with that. Keep in mind too, if you use the actual miles used method for your auto, you can’t deduct separate expenses like depreciation, gas, insurance, etc. You can use tolls though.
If you decide to do your own taxes, make sure you allow enough time to get it done. You don’t want to have to rush, because that’s where most errors are made. If you’re getting close to the filing date, and need more time, file for an automatic 6-month extension.
Just bear in mind, that the extension is only for additional time to finish your return, it’s not an extension of time to pay any taxes that are due. You need to have those paid by the original due date of the return.
Make plans now for next year’s taxes
All through this article, we’ve been saying to prepare for taxes due the next filing year, now. If your net income from the business is high enough. It’s better to pay all of the taxes that will be due by estimated tax payments. Federal and also your home state.
If estimated taxes should have been paid, the IRS and your state will assess penalties for not paying them. The estimated payment dates are April 15, June 15, September 15, and the last one on January 15 of the following year.
Plus, having a large tax balance due when you file your return is not the best way to file your taxes.