OK, so if you are a freelancer like me (either full-time or on the side), an independent contractor or run a small business, tax time gets a little more complicated. When it’s time for us to do our taxes, the IRS says we can expect to spend more than 10 hours just working on Schedule C taxes, including two hours learning about it! And, in fact, for every rule you read, there are five exceptions. It can be overwhelming! So, to help you out, here’s a quick run-down of some things you need to know before you tackle Schedule C.
- Keep good records of all of your income and expenses! The more organized you are, the easier it will be to sort it all out.
- Choose one accounting method and stick to it – cash, accrual, special, or a combination. The IRS doesn’t like it when you switch, so get some help if you need it.
- Report all your income. If you make more than $600 from a single client, s/he should issue you a 1099 form. You may also need to report real estate rental income as well as interest and dividends if they are related to your business and sales tax not passed on to your buyers.
- If you make more than $400 ($108.28 for church employees) you must pay self-employment tax, including both the employer and employee share of social security and medicare taxes, which for 2014 is 15.3% (12.4% for SS and 2.9% for Medicare). Only your first $117,000 is subject to the SS tax. In either case, that means there’s another form to file – Schedule SE.
- .. you can deduct ½ of your self-employment tax as an adjustment to income on your 1040.
- Report gains/losses from disposition of property, but must also classify those gains/losses as ordinary or capital and short-term or long-term. Your accountant would be a good resource to help with this!
- Check with your accountant to see if you qualify for business credits, too – for things like employee health insurance or alternative fuels (each has its own form!).
- Check the IRS Tax Guide for Small Business for more specific information on excise taxes, 1099’s, and Going Out of Business checklists.
Stay tuned for Part 2, where we discuss all the great deductions you can take to mitigate your tax hit!