Being your own boss can feel freeing and powerful. However, with great power comes great responsibility, especially when it comes to taxes. Taking care of all business aspects on your own means you should be prepared to handle all the financial work that comes with the new adventure. Here’s a brief tax guide for the self-employed.
Get Financially Organized
There’s nothing worse than scrambling for income and expenses during tax time. Staying organized throughout the year can save you time and money. You’ll want to maintain accurate records including:
Income statements with invoices, receipts, Forms 1099, etc.
Purchase invoices
Receipts for travel, transportation, entertainment, and gifts that are business-related
A breakdown of your assets, including purchase price, cost of improvements, depreciation deductions, etc.
Employment tax records
Know Your Responsibilities
You are already responsible for the success of your business. However, you also need to know your financial responsibilities to maintain your business. This includes paying self-employment taxes and quarterly estimated tax payments. If you earned $400 or more in 2022, you need to pay self-employment taxes. The current rate for self-employment tax is 15.3% of your net earnings, which consists of social security and Medicare tax. The good news is that since in a typical job, the employer is responsible for paying half of this tax, you’ll be able to deduct 50% of your self-employment tax during tax time.
Unfortunately, you won’t have an employer to withhold tax from your self-employed income. That said, you’ll need to make estimated tax payments by each quarterly deadline:
April 18, 2023
June 15, 2023
September 15, 2023
January 16, 2024
You should make estimated tax payments if you expect to owe more than $1,000 in federal taxes for the year. If you do not make these payments, you could face underpayment penalties.
Take Advantage of Tax Deductions
As a business owner, you have the benefit of writing off expenses that most employees cannot, as long as they are ordinary and necessary for business operations. You can write off advertising costs, supplies, legal fees, repairs, vehicle expenses, business travel and entertainment, and even more if you operate your business from home. If you aren’t eligible to participate in your spouse’s workplace health plan, you can typically pay for your own health insurance and deduct your premiums.
Those who have a business loan or business insurance can also deduct the loan interest and insurance premiums. If you only take advantage of one deduction as a business owner, you should consider the one for self-employed retirement plan contributions to an SEP-IRA, SIMPLE IRA, or 401(k). These accounts can reduce your tax bill at tax time and help you accrue tax-deferred investments gains in the future. Be sure to look into all tax deductions available so your taxable income is reduced.
Tax Help for the Self-Employed
Running a business, whether small or large, has immense opportunities for financial success. However, all of that hard work and prosperity can be taken away if you do not file your taxes correctly. In the worst-case scenario, owing the IRS taxes and not being able to pay can result in a tax lien, which can shut down your business. If this is your first year as a business owner, start off right by knowing your tax responsibilities. If you’ve had your business a while but need tax help now, we can help. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Certain business owners, including sole proprietors, businesses and rental property owners, can deduct expenses related to maintenance and repairs. The deductions must apply to their property and equipment or vehicles. However, once the repair becomes classified as a betterment, restoration, or adaptation to the property or asset, other rules will apply. Here’s a quick overview of how to expense business repairs.
Routine Repairs & Maintenance
According to the IRS, routine maintenance to a property or business helps increase the value and prolongs its usefulness. Because routine maintenance keeps the property or asset in normal working order, these expenses can be deducted in full during tax time. For example, repairing a leak in the roof of your rental property would be considered a fully deductible repair, while renovating the kitchen would be considered a capital improvement, which has other tax implications.
Capitalization
Capitalization, on the other hand, is considered to be a betterment, restoration, or adaptation to the property. In this case, you must capitalize and depreciate the expense over several years. Betterments are repairs that improve a property or business asset. This can include expanding a property or fixing a defect that existed before you purchased the property. Restorations are repairs that restore an asset to its normal condition, like replacing a roof. Adaptations are repairs that change how the property or asset is used. For example, converting a garage into additional office space would be considered an adaptation and would need to be capitalized. Generally, when depreciating these expenses, it is done over a 27.5-year period.
Home Offices
For smaller business owners or remote workers, there are home office deductions you can take advantage of during tax time. The IRS divides home office expenses into a couple categories: direct and indirect expenses. Direct expenses benefit your home office only while indirect expenses benefit both your office and your home as a whole. The rules of repairs and improvements also apply to home office expenses. Repairs are entirely deductible while improvements must be depreciated. You can determine if the expense needs to be depreciated if it fits the standards of being a betterment, restoration, or adaptation.
Tax Relief for Business Owners
The rules for expensing business repairs and improvements can become tricky. The most basic rule to remember is to deduct the expense when it is a repair that doesn’t qualify as an improvement to your property or business asset. You must capitalize and depreciate expenses that are considered a betterment, restoration or adaptation to your property or business asset. There are some exceptions to these guidelines, referred to as “safe harbors.” You should always check with a knowledgeable tax professional to ensure you remain compliant when capitalizing and depreciating expenses. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Small business loans can be helpful and sometimes necessary in order to continue or expand a business. There are several types of loans available to small businesses, each with their own sets of pros and cons.
Term Loans
One of the most common types of loans for small businesses, a term loan is a lump sum of funds that is paid back over a fixed term and typically via fixed monthly payments. Interest will be paid on top of the principal balance borrowed. Sometimes it’s at higher rates than those offered by a traditional bank. However, it is a popular loan because funding is quick and it offers opportunities for business expansion.
Small Business Administration (SBA) Loans
SBA loans are offered by banks and lenders but administered by the Small Business Administration, a government agency that provides support to small businesses. Some business owners will prefer this type of loan since it’s backed by the government. It also offers high borrowing amounts at low rates and has long repayment terms. On the other hand, it’s harder to qualify for and it comes with a long and tedious application process.
Business Lines of Credit
Like a regular credit card, a business line of credit gives business owners access to a credit line of a certain limit, which is usually determined by business revenue and credit. Interest is only paid on the money charged, allowing greater flexibility in cash flow. This type of loan may also require paying additional account maintenance fees.
Equipment Loans
Businesses that want to own equipment can look into obtaining an equipment loan, which allows them to pay for business equipment over a specific term. The equipment will then serve as collateral for the loan. Sometimes a down payment is required for this loan.
Microloans
Microloans are small loans usually offered by nonprofits or government agencies and loan business owners up to $50,000. They are popular among startups and businesses located in disadvantaged cities. Some of these loans are accompanied by mentoring or consulting from the loan provider as well.
Invoice Factoring
This service allows businesses to sell their unpaid invoices to lenders to collect on. In return, the business will receive a percentage of the invoice value. This can benefit businesses that are awaiting payment from customers but need cash immediately.
Invoice Financing
Similar to invoice factoring, invoice financing allows businesses to sell their unpaid invoices as collateral in order to receive a cash advance. In this case, the business is still responsible for collecting payments from their customers in order to repay the amount financed.
Tax Debt Relief for Small Businesses
There are several loan options available to small businesses, whether they are a startup in need of fast cash, or an established business looking to expand. It is essential for small businesses to ensure that they are compliant with all tax laws in order to keep their business going. If you need tax help, give us a call at 800-536-0734 for a free consultation today.
