Tax payments are a big part of incomes and finances. There’s no way anyone, from any profession, can evade paying taxes. Furthermore, to avoid an audit, it is imperative to do it right the first time. It can further trickier if you are self-employed or a business owner. Paying taxes are an integral part of running a successful business. As opposed to W-2 employees, taxes aren’t deducted automatically from the paychecks of self-employed persons. Therefore the responsibility of tracking and keeping up with what they own and how they have to pay it rests with the individual.
It goes without saying that since taxes aren’t deducted by default, take-home pay for the small business owners or self-employed would definitely be a bit higher than the wage earners through a fiscal year. It’s an attractive notion to keep all the money to yourself, after all, you made it, and it’s yours. However, unless you want the authorities knocking at your door, it’s wise to do the math and set aside an amount for your tax obligations. Every business owner, big or small, self-employed, freelancers, as well as corporation owners, are themselves answerable and responsible for the upkeep of the tax laws, as per their businesses. It has to be remembered that where financial literacy is a much-needed skill, it includes the understanding of taxations. Keeping track of taxes is a daunting task since your income will vary so often. However, with the information below, calculating taxes may just become somewhat simpler
1) Tax Obligations for the self-employed.
When you are self-employed, especially as a freelancer, you must take tax deductions into consideration before setting a price for your work. Always think about tax burdens when you are planning your finances, for instance, saving money against investing it in the business, as well as keeping track of the business expenses to subtract them at the last of the year. A self-employed individual pays a self-employment tax (SE tax) in addition to an income tax. However, before determining the tax obligations, it is important that you are aware of your tax rate, as well as information if your area of residence requires distinct city taxes. To know your rate, begin with figuring out net profit as well as the net loss (if applicable) from the business. Then calculate the taxes by deducting the business expenses from the business income. This will show if you are going to have a net profit or net loss. When your expenses are less as compared to the income, the difference results in net profit. Conversely, if the expenses (and taxes) end up being greater than your income, you will suffer from a net loss.
2) How to save on taxes
If you’re shifting from a full-time position to self-employed one, it’s imperative to note down the trade-offs. Here are some tax-saving tips that may come in handy for you for your first time as a self-employed taxpayer. The most important one is to consider the startup costs; which a newly established business can deduct. This can be in the form of experiments, legal fees as well as marketing and advertisement. In addition to this, vehicle expenses such as mileage can also be deducted by the taxpayers. Another interesting way to deduct from taxes is to deduct a “work from home” deduction. Since you are using your home as an office space, hence, a percentage from the home expenses such as property taxes and mortgages can be deducted. If you can prove that certain supplies and snacks at home were specifically for work use, this expense can be deducted as well. This included computers, printers, fax machines as well as phones. A greater deduction comes in the form of health insurance. You can deduct what you pay for health insurance, for yourself and your family. There are a surprising number of things that can be legally deducted from tax if you are vigilant and clever enough.
3) Learn about when to file and when to pay
Learning a proper file-report-pay cycle for taxes can save you from arrears and fines. When you as a business register for collection and reporting sales and use tax, the tax authority issues notice to you about the proper filing frequency, as well as issue notices as per the tax type if there is a law that treats tax types differently. Mostly, there is a defined filing frequency about the reporting and payment of taxes to the authorities and is based as per the revenue. The typical period is around one month, and the tax is usually due on the 20th to 25th of the month following your reported period. The main thing to remember here that every tax territory, as well as the jurisdiction, has a separate filing frequency thresholds, and this frequency is subject to change.
4) Keep track of exemption certificates
In every line of business and self-employment, there are certain areas as well as types of business that are liable to an exemption. The authorities issue special exemption certificates for this. You need to have a solid reason for this exemption. One of the cases can be that you are in a remote location, like a freeway town or a university town. Another is if you have a proven medical disability. A more commonly occurring reason is having unreliable broadband connections or telephone and mail system. In this case, either you are helped through such a crisis by paying only partial taxes, or, depending on the severity of the problem, you can be completely exempted as well.
Conclusively, be prepared about your expenses, profits and losses all year around. Don’t wait for the last moment to calculate all the variables. Invest in tax calculation software as well as expenses tracking tools. These are cheap and very efficient in calculating all your financial variables. The key is to be prepared for tax payment as well as for being organized with your finances throughout the year.