Managing Your Taxes when You're Self-Employed

Many small business owners dread the month of April, knowing that tax time lurks in the middle of it. Taxes can be a labyrinth of technical and financial terms that drive even the most patient of people insane. Here's the guide to help maneuver through those rough waves of forms and deductions.

The form you submit along with your 1040 is the Schedule C form; if your business expenses were less than $5,000 for the year, not opting for the home office deduction and have no employees working for you, you're in luck and can use the shorter Schedule C-EZ form. If you earned more than $400 (net) during the year, you're also going to file a Schedule SE to determine your self-employment tax; this includes medicare and social security. Obtain 1099 forms from clients that report your previous income, which is where you'll be getting all your information to complete the previous forms.

Since you're self-employed, you're responsible for both your and your employees' social security and medicare, equal to roughly 15% of your net income. This is why you need to save where you can, making deductions an important part of your tax filing. Right away, half of the self-employment tax you pay is deductible, as is any equipment you purchase for your business such as computers, fax machine, and any other equipment you use solely for the purpose of your business. Office supplies, work-related phone calls, mailings, advertising, travel and other related expenses are also deductible. (Just don't add that two week trip you took to Hawaii without a good business-related reason, or you could find yourself in hot water with the IRS faster than you can say "Aloha".) If you aren't eligible for health insurance from an employer (or your spouse's employer) you may also be allowed to deduct your health insurance premiums, but you aren't able to deduct more than the net income of your business.

Business use of your home might be deductible, including some of your utilities, homeowner's insurance and mortgage. To determine this amount, you need to determine the percentage of your home that you've designated for business use. (Go to www.irs.gov for more information on the business use of your home for more info on how to calculate percentages.)

Are you concerned with retirement? You can lower your taxes by contributing to a self-employed retirement plan; deduct the contribution now, and the money you invest will be tax-deferred until you retire.

If it turns out you're going to owe more than $1,000 when you file your tax return, you should probably pay quarterly taxes. On the other hand, if you aren't entirely self-employed (if you have a job with an employer) or if your spouse is employed, you can increase your withholding to cover that income instead of paying quarterly taxes. Again, the IRS website has more information regarding which choice is better for you.

Taxes aren't frightening if you stay on top of them throughout the year. As always, keep records of everything you earn and your expenses so you won't have to tear the house apart on April 14th looking for that receipt you knew you left in the living room (somewhere.) With these tips you should be ahead of the game when tax time comes around again.