*Note: This was written by a Yahoo! contributor. Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
Depending on the success of their business, self-employed individuals may owe self-employment taxes at the end of the year. Your clients will file 1099-MISC forms with the IRS to report the amount of income paid to you during the year. You will use these in addition to your own records to complete your tax returns. Careful record keeping will make preparing self-employed tax returns much easier; however, either way you must be prepared to figure your gross income, expenses and self-employment taxes.
Determining Gross Income – Hopefully you have kept excellent records during the year and have an accurate accounting of all your receipts. If not, your first task will be to review all of your bank statements, receipt books or other proof of your income for the tax year. The income you report on Schedule C of your 1040 tax return must be equal to or greater than the total of all 1099-MISC statements you receive from clients. Reporting income on Schedule C that is less than the total 1099s reported to the IRS will result in an audit.
Reductions to Gross Income – Qualified business expenses reduce your gross income thereby reducing the amount you will owe in taxes. Again, if you are organized this should not be difficult; however, if you have not kept proper records organizing your business expenses will be a headache. Whether you use accounting software (i.e. QuickBooks), a handwritten ledger, a set of envelopes or a shoebox, the best way to enter expenses is to organize them into the same categories that appear on your Schedule C. Most businesses have normal operating expenses such as advertising, rent, supplies, payroll, taxes, insurance and utilities. Keeping your expenses organized in the same categories as shown on Schedule C will make preparing your tax returns much easier.
Health Insurance Premiums – If you are self-employed and you pay for your own health insurance, you can take a deduction for your health insurance premium only if you have a profit for the year. However, if you have a net loss or no profit, you may be able to deduct the health insurance costs on your personal itemized deductions. If in doubt, talk to a tax preparer to avoid problems in the future with audited or revised tax returns causing you to owe taxes, interest and penalties.
Deductions for Home Offices – Do not forget this valuable deduction if you work from your home. You can claim a deduction for your rent/mortgage payments, utilities and depreciation if you use part of your home as your office. The amounts must be prorated for the square footage of your home office but it is a deduction that should not be overlooked by 1099 individuals.
Self-employment Taxes – Most individuals who are self-employed and receive 1099s neglect to put aside funds during the year to pay their self-employment taxes. If you have a side job that does not make much money, you may not owe any self-employment taxes; however, if you will be netting a profit then you probably will owe taxes. It is better to be prepared than to have a large tax debt with no way to pay it. Self-employed individuals should pay estimated quarterly taxes or, in the alternative, open a savings account and deposit an amount quarterly to cover any self-employment taxes owed at the end of the year.
More from this contributor:
Attorneys and Small Businesses: A Winning Combination
Small Businesses and Taxes: Tips for Surviving Year-End Tax Obligations
Year-end Financial Planning Essentials for Saving Money, Preparing for Taxes and Retirement