Self-employment requires many additional responsibilities. Although you are your own boss and control all aspects of the business, you must also control all of the business's financial matters, including the income tax return. The IRS offers many tax deductions to a self-employed taxpayer, especially if you work from home. Keeping adequate records and receipts will help to maximise your business expenses and lower the amount of self-employment tax owed to the IRS.
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A self-employed taxpayer can deduct certain household expenses if the business office is located in the taxpayer's home. A home office must be space dedicated exclusively for the business. The percentage of deductions is equal to the amount of space the home office uses in the home. If your home is 1000 square feet and your home office is 100 square feet, you are allowed to deduct 10 per cent of certain household expenses for your business. Deductions can include a percentage of rent or mortgage payments, utilities, property taxes, repairs and maintenance, phone, homeowner or renter's insurance and any other routine expenses to maintain the home.
Keep records and receipts for all business-related expenses. Most business expenses are tax deductable and having a detailed record can help in completing your income tax return. To avoid confusion, make sure to properly categorise each expense when the expense is paid. In general, if an item or service is needed for the business to function, it is tax deductable. Be very careful to separate business and personal or pleasure items from your business's financial records.
When you are self-employed, it is important to understand the self-employment tax. The self-employment tax is the amount of Social Security and Medicare taxes owed to the IRS on your income. As of the 2010 tax year, a self-employed taxpayer must pay 15.3 per cent tax on their income. If you feel that your deductions will not cover the amount of taxes you will owe to the IRS, you may wish to make estimated tax payments. Estimated tax payments are paid to the IRS four times a year. If you overestimate your taxes after preparing your income taxes, you will receive this amount as a refund.
Setting up a retirement plan defers taxes owed to the IRS. A self-employed taxpayer can contribute up to 25 per cent of their income to a retirement plan. Contributions to a retirement plan are not taxable until you begin withdrawing the money.
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