Anyone who works from home—whether as an entrepreneur, freelance writer, consultant or distributor for a company—should take the time to understand the ins and outs of taxes and how to properly utilize deductions. This article will address various steps that individuals who work from home can take in order to get a grip on taxes and deductions.
Getting a Grip on Taxes and Deductions
As an individual who works from home, it can seem overwhelming to have to be totally responsible for your taxes yourself rather than having an employer make the process simpler for you by deducting taxes from your paycheck. However, understanding taxes and deductions doesn’t have to be rocket science.
1. When in Doubt, Seek Assistance
One first rule of thumb is to be smart and know when you need help. It’s better to seek assistance with your taxes and understanding deductions than to majorly mess up and end up with an IRS audit. One major difference with an individual who works from home and someone who is employed by an employer is how the taxes are reported to the IRS. Regarding the former, your income is reported on a 1099 form and for the latter, the income is reported on a W-2 form. Susan Lee, EA, CFP is a tax and financial planner who has written an excellent piece of advice for freelancers regarding taxes and reporting income and expenses. Additionally, you can find a variety of resources and help on the IRS website regarding downloading forms, filing assistance, payments, and refunds. You can also find out the contact information for your local IRS office and your local taxpayer advocate office.
2. Follow the 3 Basic IRS Considerations
When it comes to recording expenses for deductions, it is important to understand the IRS regulations. According to Lindsay Angus from Bench, there are three basic concepts that the IRS considers with regard to taxes and deductions: “exclusivity, regularity and precedence”. Basically, you must have an area that is specifically designated for your office workspace. It must be utilized regularly for your home business and this space is required to be the actual “home” base for your business.
3. Make a Tax Plan and Stick to It
When working from home, it is important that you make a tax plan and stick to it. You don’t have an employer to rely on for deducting taxes from your regular paycheck so it is vital to find a way to be consistent with your own system. Once you have begun to pay in your estimated taxes, you should receive declaration forms for the quarterly taxes you need to pay in. As you pay your estimated taxes each quarter, you should have enough paid in so that you won’t have to pay more taxes when you file the following April. You can find out more information on estimated taxes regarding how to pay, who must pay, who doesn’t have to pay, how to figure out estimated taxes and when to pay them, and penalties for underpayments for estimated taxes.
4. Keep Excellent Records of Income & Expenses
This final step involves being diligent to keep excellent records of your total income and expenses. When working from home, you must keep proper records on monthly profit and loss statements, estimated quarterly taxes paid in, bank account records, monthly expenses, and any audited financial records. You can find more details on recording income, expenses and deductions on the instructions for the Schedule C (Form 1040). Individuals may not realize how many items they can actually list as tax deductible. The main requirement for something being tax deductible is that it is an essential item or factor of operating your business.
For example, you can deduct office equipment that you need to purchase for running your business. If you work as a distributor for a sales company and need to order any products as sales samples or are required to buy products each month for personal use in order to receive a commission, you can claim those items as deductions. Remember to keep all receipts for proper record keeping, for tax filing purposes, and filed for seven years in the event you are audited by the IRS.
Some individuals seek the advice and counsel of certified accountants throughout the year and when filing taxes. Finally, make sure that you follow the proper IRS guidelines with regard to deductions and properly classifying them. If they are not properly classified, the IRS may disallow them.
Getting a grip on your taxes and deductions begins with seeking assistance when needed, whether from a personal accountant or directly from the IRS website. It is important to have a dedicated office space. Additionally, you must pay in your quarterly estimated taxes so that you do not incur any penalties. Finally, keep excellent records of your income and expenses.