Self-Employed Tax Problems
Self-employed individuals do not usually have regular state and federal taxes deducted from their paychecks. These individuals are responsible for making sure they make the proper tax deductions from each paycheck and set it aside to pay their taxes at the end of the year. In addition to paying state and federal taxes, the IRS charges the self-employed a self-employment tax. Not accounting for taxes can lead to problems for self-employed individuals when it comes time to file their returns.
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Failing to Estimate Taxes
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Since self-employed individuals do not pay taxes throughout the year, a common problem for the self-employed is the failure to estimate their taxes. All income earned through self-employment is subject to state and federal taxes. Not estimating the tax liability for earnings throughout the year can lead to owing taxes when filing returns. Not paying enough in taxes can also trigger a tax underpayment penalty. Self-employed individuals can pay their estimated taxes to the IRS four times a year to avoid having to make a lump sum payment when they file their returns.
Deductions
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Tax deductions for the self-employed can cause some problems as well if the individual does not know which deductions are allowable. Self-employed individuals can take a home office deduction as well as deductions for equipment purchased strictly for business use. If it is necessary for the individual to use his personal vehicle in the course of his business activities, the mileage is also deductible. Only the mileage for business purposes is deductible. Fifty percent of meals and entertainment expenses incurred during the course of doing business is also tax deductible.
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Keeping Receipts
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Self-employed individuals cannot take tax deductions for which they do not have a receipt. If the individual purchases new office equipment for his business, he can only take the deduction if he keeps the receipts. This is also the case when it comes to deducting meal and entertainment expenses, cell phone use and home office utility costs. Mileage deductions must have a written record of miles driven for business purposes. Keeping a written record of mileage is also a requirement for taking the mileage deduction on state taxes.
Forgetting the Self-Employment Tax
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The self-employment tax applies to anyone who earns more than $400 from self-employment activities. This tax applies to independent contractors, sole proprietors and those who are self-employed part-time. Currently, the self-employment tax rate is 15.3 percent of net income. The IRS separates this tax into 12.4 percent for social security and 2.9 percent for Medicare. Earnings over $106,800 are exempt from the social security portion or 12.4 percent of this tax. Self-employed individuals are able to deduct half of the amount they pay for the self-employment tax from their adjusted gross income or AGI.
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