Tax Planning for The Self-Employed
There are more benefits to being self-employed than just being your own boss. You may qualify for valuable tax deductions as well. The Colorado Society of CPAs offers the following advice to help you meet your tax responsibilities and claim the tax breaks you deserve.
PAY ESTIMATED TAXES THROUGHOUT THE YEAR
The benefits of being self-employed also mean added responsibilities. Since your clients don't withhold taxes when they pay you, you must make estimated quarterly tax payments if your estimated tax liability is $1,000 or more. To avoid underpayment penalties, make estimated payments that total at least 90 percent of what you expect to owe for 2005. Another option is to make estimated payments (and withholding if applicable) equal to 100 percent of your 2004 tax (110 percent if your adjusted gross income in 2004 was more than $150,000 and you filed jointly). Payments are generally due on April 15, June 15, September 15, and January 15.
MAKE THE MOST OF THE EXPENSING DEDUCTION
There's a special tax break available to business owners called Section 179 expensing. It enables you to write off up to $105,000 of the cost you pay for new or used qualifying business property in 2005, instead of depreciating the expense over several years. This includes new computer hardware and off-the shelf software. To qualify, the equipment must be put into service by December 31.
CONTRIBUTE TO A RETIREMENT ACCOUNT
Whether it's an Individual Retirement Account, a Keogh, or a Simplified Employee Pension (SEP) plan, saving for retirement is one of the best ways to lower your overall tax bill. Money invested in retirement accounts accumulates faster than funds in other investments because earnings grow tax-deferred until withdrawn. And remember the tax savings can actually finance part of your contribution.
DEDUCT HEALTH INSURANCE
In 2005, as a self-employed worker, you can deduct up to 100 percent of the premiums paid for health insurance for you, your spouse, and your dependents.
TAKE THE HOME OFFICE DEDUCTION
Your home office may qualify as your principal place of business if meets the following criteria: (1) it is used exclusively and regularly either as a place of business to meet clients, patients or customers in the normal course of your business or for administrative or management activities and (2) you have no other fixed locations where you conduct substantial administrative or management activities. Self-employed workers who qualify can deduct a proportionate share of certain costs including mortgage interest or rent, depreciation, real estate taxes, repairs, utilities, and homeowner's insurance, as well as direct costs like office furnishings. Keep in mind that the deduction can not exceed the income you realize from your home-based business.
KEEP TRACK OF AUTO EXPENSES
There are two methods for deducting business-related automobile expenses. You can keep track of the business miles you drive and multiply your total for the year by the IRS 2005 standard mileage rate of 40.5 cents per mile, plus parking fees and tolls. Or you may deduct the business portion of the actual expenses you incur for gas and oil, insurance, repairs, tolls and parking, and license and registration fees.
HIRE YOUR CHILDREN
A simple tax-saving strategy is to hire your child. You get a business deduction for the wages paid and, if your business is unincorporated, you owe no Social Security or employment taxes on the amount you pay to a child under age 18. Just keep good records and be sure the work done by the child is bona fide.
Self-employed individuals are able to write off many business-related expenses. Deductible business expenses include stationery and office supplies, postage, Internet access, advertising, subscriptions to professional journals, and many other legitimate costs of doing business. For qualified business travel, you can deduct 100 percent of your transportation and lodging expenses and 50 percent of meals and entertainment.
CONSULT A CPA
Self-employed individuals have many opportunities to trim their tax bills. A CPA can provide detailed information and advice to help you save your fair share.