It’s a yearly rite of passage that no one really looks forward to completing, but there’s really no choice. Procrastinating before filing taxes is all-too-common and a mistake made too often by the self-employed.
Lack of planning leads to missed opportunities for deductions and other tax savings, Medows, says.
He listed the most common errors he sees made by the self-employed:
Not keeping track of expenses during the year. There are many chances for deductions but without a careful record the opportunities will be lost.
Not storing original receipts. Keeping track of expenses won’t do any good if the IRS calls you in for an audit and you don’t have the documents to back up deductions.
Failure to pay estimated taxes. This can get a taxpayer in trouble with the IRS.
Medows said the worst mistake, one he called “superglaring,” is failure to get advice from a tax professional from the time a business is set up.
In addition, consultations throughout the year are key to ensuring filing taxes will be a smooth process.
1. Home office deductions
This can be a great source of reducing the tax bill if you work at home. The IRS in 2014 offered taxpayers a simplified way to calculate the allowable deduction.
2. Health insurance premiums
Under many circumstances, the costs of medical, dental or long-term healthcare premiums are deductible. This deduction covers premiums for a spouse and children up to age 27. There are strict guidelines that must be met and the deduction will not reduce the amount of self-employment tax owed.
3. Self-employment tax
Anyone running their own business finds out quickly about the self-employment tax, which essentially doubles the amount paid by a regular employee to cover Social Security and Medicare. There is some relief in the form of a deduction equal to one-half the amount paid.
4. Retirement tax shelters
Opening a SEP IRA or a Keogh plan is a good way to reduce the tax bill and save for retirement. Up to 20% of earnings can be contributed with a cap of $52,000 per year. That’s far greater than the amount that can be placed in a traditional IRA.
5. Depreciation of equipment
Most types of property – except land – owned by and used in a business, can be depreciated. To be eligible for depreciation, the equipment must be used for more than one year, among other rules. Tables provided by the IRS spell out the formulas to be used to determine the amount of depreciation that can be claimed.