One of the greatest but most difficult aspects of being self-employed is being in charge of your finances.
Unfortunately being self-employed often means you’ll have a harder time keeping track of your financial records than company-employed individuals, as you very likely have multiple streams of income. So, when it comes to doing your taxes, there are some things you should do in order to keep compliant and stay in business.
Be aware that the self-employed are taxed differently than fulltime employees of a company. When the IRS examines your records, the amount you’re taxed is determined by your net self-employment income, which is basically what you are left with after different business expenses are deducted from your gross business revenue. Generally, there are two taxes that apply to the self-employed: the income tax, and the self-employment tax that is determined by how independent contractors pay their Medicare and Social Security taxes.
If you are self-employed, managing your finances is tricky but totally doable. To make it easier on yourself, do your taxes at quarterly intervals rather than in one swoop on April 15th. Always report all of your income! Being self-employed means you must calculate, or at least estimate, what you owe in taxes to make quarterly payments, therefore, you should consistently put a portion of your income away for tax purposes.
Keep your business records separate from your personal records. When you are self-employed, it’s a good idea to open a new bank account specifically for depositing business income and keeping track of related expenses. If you ever encounter a problem with the IRS, or need to dispute some sort of claim, having an official record such as a bank statement can be of great service. It’s also the easiest way to estimate what you owe for taxes as the history of your transactions will help you see where you money went.
Make a sincere effort to learn which business related expenses could be deducted from your taxes. If you’ve spent money on business related travel, dinners, dry cleaning, work equipment or made other relevant purchases, keep the receipts to show to your accountant later on. However, don’t pass off your hobbies as business expenses. This is a bad move made by many self-employed individuals who find themselves in hot water with the IRS. If all of your laundry expenses are classified as business-related, this will definitely set off a few red flags.
Always file away all of your pay stubs, check IRS.gov for updates pertaining to policy changes and tax requirements, and never be afraid to ask a seasoned accounting professional for guidance. At ERPS Group, we are more than happy to assist you with taxes, and any other financial services!
When it comes to being self-employed and staying compliant, keeping careful track of your finances is key.