It makes no difference whether you do occasional work or work full time as an independent contractor; Current tax laws require that you report this income at tax time. Cash payments don’t get you out of the way of the law, nor does the fact that you “operate” the business.
People who don’t run businesses simply report the total of all cash and checks as miscellaneous income on their personal tax returns. Costs are cut there too; but the expenditure cannot exceed the income. A person who has occasional income from hobby activities will fall into this category.
Entrepreneurs and self-employed women report all income and expenses on Schedule C, the small business tax form. The profit or loss calculated there is transferred to their personal tax return. An entrepreneur can use any business loss to offset personal income tax debt. For many, especially during those early years, this often drastically lowers the overall tax burden.
People become self-employed for many reasons, but the driving force is mostly the desire to make money. When you run a business for yourself, how much money you keep in your own pocket depends on how well you understand the costs involved in generating that income. And for many, one of the biggest costs is taxes.
Self-employed are allowed to deduct all legitimate business expenses, depreciate major purchases, take advantage of business tax credits, research and development expenses, deduct a portion of their residency if they have a home office, and more. And, after deducting those costs, the remaining profits can be further reduced through pre-tax benefits, business retirement account deposits, education, and a number of other items designed to keep more money in the business owner’s pocket.
There are many ways to avoid paying taxes; when you do it legally it’s called smart tax planning. The IRS Code includes a long list of tax-free expenses available to individuals and business owners; You just need to know what it is and how to use it to your advantage.
It’s important for the self-employed to realize that income tax isn’t the only bill that’s imposed at tax time when you work for yourself. This is also when you determine what you need to deposit into your personal Social Security and Medicare accounts.
When you work for yourself, these two taxes are collectively referred to as the Self-Employed Tax. As an employee, your employer is required to pay half of your FICA (Social Security) and Medicare taxes. When you are self-employed, you pay in two parts because you are now both the employer and the employee, and that amount can be quite a lot if you are not prepared. And that’s where tax planning really helps.
Tax planning is a combination of projecting next year’s income and expenses, using current tax laws to increase pension and insurance benefits, scheduling taxable events in your business and personal future, looking for changes to the tax law that will affect your bottom line, and calculate each quarterly tax deposit. A good tax professional not only prepares your tax return, he or she also helps you with tax planning as part of your annual visit.
If your tax professional doesn’t offer tax planning, you’re not getting full value for your money, and you’re probably paying too much tax. When tax planning is done right, there are few surprises at tax time, your returns are audit proof, and you have a clear picture of your financial future. And it makes business sense.
