Self employed expenses can be a bit tricky to figure out, especially since most self employed people work from their homes. With a process in place and an understanding of how to claim and what to claim, you can get through the filing process and have more experience and confidence going into the next year.
Step 1: Register with the State
Even self-employed people need to register as a sole proprietor with your local Secretary of State office. Your tax bracket will be different as a self employed individual rather than if you were filing personal taxes or small business taxes.
Step 2: Understand Your Tax Status
Because your self-employment status does put you in a different situation, you need to understand what that means as far as claiming, expenses, income and all that. Information is available on the IRS and your local Department of Revenue sites. To make sense of it all, it's better to speak with a tax consultant who can tell you how much you're expected to pay based on your expected income for the year. They can also clarify what you can write off and tell you how to track that in your financial records.
Step 3: Decide on Your Filing Status
Self employed individuals still claim using a 1040 form. You can claim individual or you can claim married status. Depending on your situation, it's usually better to claim married. Once you know how you will be claiming, take a look to see what your expected payment will be. Because you don't likely have taxes taken out throughout the year, you'll owe at the end. The best way to combat this is to make quarterly tax payments.
Step 4: Keep Good Records
In order for your claim to be accurate, you need to make sure your financial records are perfect. Do this by using a fool proof system (financial software is the best way to do this) and claim exactly as your tax consultant advised. If you work at home, this will mean tracking entire rent, utility and other bills even though your work space doesn't use the entire amount of these expenses. When you complete your taxes, these will calculate down correctly.
Step 5: Fill out All Required Forms
When it's time to file your self-employment taxes, make sure you have all the forms you need. This will include a self-employment form, Schedule SE and potentially other forms. When filling out the Schedule SE, you will need to calculate your actual expenses which will include calculating the square footage of your work space in comparison to your entire house. The same needs to be done for your utilities and other bills. If you have employees or independent contractors, you will need to complete 1099's or other forms. If you're concerned or confused at any part of the process, don't hesitate to contact a tax adviser. It's better to ask for help than make a mistake.
Self employment expenses may seem difficult to figure out and can be a bit confusing at first glance, but with good records and a basic understanding of tax forms, you can claim your expenses correctly and know what to expect when your tax forms are accepted and finalized.