5 Tips For Self-Employed Taxpayers

When an individual works for themselves, he or she is considered self-employed for taxes, which means the individual is responsible for paying and filing taxes on a scheduled basis. These individuals will have some advantages and disadvantages at tax time.

Five Tips For Self-Employed Taxpayers

  1. A self-employed individual will have to pay income and self-employment tax. The self-employment tax includes Social Security and Medicare taxes. Normally these taxes are withheld from an individual’s wages, but a self-employed individual will have to pay these taxes by filing a Form 1040 Schedule SE. However, the individual does get to deduct half of this tax from his or her income on Form 1040.
  2. The earnings will need to be reported on a Schedule C or C-EZ Tax Form. This form will show whether an individual made money from a business or had a loss from the business. It will be used in addition to the Form 1040 and Schedule SE.
  3. Sometimes, a self-employed person will have to make estimated tax payments during the year. Even though some people work as an employee on other jobs with taxes withheld, it is still important to make these estimated taxes if an individual has any self-employed income. An underpayment of taxes at the end of the year could result in a penalty. Therefore, making quarterly estimated tax payments will save the individual from being penalized for underpaying.
  4. If an individual had business expenses, these will be listed and deducted from the Schedule C earnings. The expenses must have concurred during the current tax year to claim as a deduction. A business expense is one that is common and necessary for the operation of that business.
  5. Many common deductions can be overlooked, such as printing business cards and postage. Forgetting about a deduction can cause an individual to pay more taxes.

An independent contractor or sole proprietor of a business will have different tax obligations than an employee. For instance, the self-employed individual will pay more Social Security and Medicare taxes than an individual who is not self-employed. An employer will pay part of these two taxes for their employees, but a self-employed individual will be responsible for all of the taxes.

How to Estimate Self-Employment Payments

  • An individual can use the income tax return from the previous year to get an estimate for payments.
  • Look at the income and the self-employment taxes to figure the payments.
  • If this is the first year for self-employment, the taxes can be estimated based on the income that an individual plans to earn that year.
  • Adjustments can be made to the estimated payments after the first quarter if the estimate appears to be too low or too high.

Self-employed individuals need to file accurate tax returns with the proper deductions. Keeping good records throughout the year will ensure that no deduction is overlooked. At the end of the year, the taxes will be easier to file when the information is accessible along with estimated payments.

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Paying for College: Student Loan Interest Deduction Explained

Interest on student loans can get overwhelming. Luckily, the IRS allows for the Student Loan Interest Deduction which can be taken by qualified filers. The deduction allows for any paid interest to be deducted from amount of income earned annually and provides a valuable tool to help balance finances for those in the throngs of repayment.

Eligibility

Any loan taken out for the sole intention of covering eligible expenses related to the pursuit of a higher eduction is considered a “qualified” student loan with deductible interest. The elegibility of expeneses includes those for which the Tuition and Fees deduction is applicable.

Those attempting to claim the deduction must be indepedent of caregivers and cannot be considered an dependent or exemption on any other tax return. The deduction also carries other conditions and must meet certain criteria related to annual income, a legal obligation to pay interest, and the amount of interest actually paid during the year one is filing.

Interest on student loans can get overwhelming. Luckily, the IRS allows for the Student Loan Interest Deduction which can be taken by qualified filers. The deduction allows for any paid interest to be deducted from amount of income earned annually and provides a valuable tool to help balance finances for those in the throngs of repayment.

Eligibility

Any loan taken out for the sole intention of covering eligible expenses related to the pursuit of a higher eduction is considered a “qualified” student loan with deductible interest. The elegibility of expeneses includes those for which the Tuition and Fees deduction is applicable.

Those attempting to claim the deduction must be indepedent of caregivers and cannot be considered an dependent or exemption on any other tax return. The deduction also carries other conditions and must meet criteria related to annual income, a legally-observed obligation to pay interest, and the amount of interest actually paid during the year in which one files.

Married couples can claim the interest deduction only when filing jointly. The IRS allows one to deduct up to $2,500 annually for any interest paid on student loans which meet federal requirements. Any amount of interest above the threshold of $2,500 doesn’t count, nor can any deduction exceed the actual amount of interest paid.

Interest generated via the various types of educational loans can qualify for the deduction, including: interest on the loan itself, interest on any consolidations, and interest accumulated via lines of credit. The most important qualifier for determining eligible interest involves the intention of money borrowed, any money was used for educational expenses is generally applicable.

Deductions Versus Credits

Tax deductions differ from credits. Credits reduce the total of tax owed whereas deductions reduce the amount of income which can be taxed. The Student Loan Interest Deduction can be taken for up to $2,500 of any interest actually paid in the previous tax year. Deductions lower one’s revenue by the amount of the deduction. Therefore, the actual amount of income tax is lowered along with the tax burden and total bill which one pays.

Forms

Appropriate filing procedures for the Student Loan Interest Deduction are claimed as an adjustment to income, and therefor do not need to be itemized. Filers cannot take such deductions on Form 1040EZ. However, the deduction can be taken on line 18 of Form 1040A or on line 33 of Form 1040, both of which can be submitted via the free IRS efile process.

The cost of college seems never-ending to someone in the doldrums of student loan debt. However, interest paid can often be replenished via a tax return for those who qualify, which helps ease the burden. As with most tax scenarios, understanding the proper filing procedures and following the correct protocol can contribute to a much larger tax reimbursement.

Citations:

Katei Cranford is a writer who shares her expertise of financial situations for students and graduates.

The Pitfalls Of Doing Your Own Taxes

Doing your own taxes might seem like an easy enough thing to pull off. You just get your W-2 form, put in the numbers and you are good to go. However, there can be more to doing your taxes than just simple math, and even that can be hard to do for some people. While it might not be fun to have to pay someone to do your taxes, it can save you a lot of headaches down the line.

You Could Get The Numbers Wrong

Doing your own taxes means inputting your own information. If you have a W-2 and you are using software, this should be no problem. However, if you are self-employed, or are doing taxes by filling out a form by hand, it can get a little tricky. Instead of knowing that you have made 5,294 dollars during the year, you guess and just say 5,000 dollars. The IRS is not going to like that you have under reported income.

Even if you do get the numbers wrong, but correct it, you can still find yourself in trouble. The IRS tends to audit returns more if there are a lot of eraser marks, or if the numbers look fudged. If you have to do it yourself, at least use software to do so.

You Might Miss A Deduction

A taxpayer doing their own taxes might not realize that the new computer software used for marketing your business is actually a deduction, or that part of your home utility bills can be deducted if you run your business in your home. Not knowing all the deductions that are available to you can leave you owing more to the IRS and that can hurt even more in the down economy

Conversely, the taxpayer who is going it alone might give a deduction that is not legal. A new grandfather clock placed in your office isn’t necessarily a deduction. Driving to a convention in Miami with your family is only partially deductible. Knowing what is a deduction and what is not can get you into trouble come tax time.

Poor Record Keeping Can Kill Your Chances

Having someone do your taxes could salvage a decent return if you don’t do well keeping your own records. A tax professional can clue you in to good software that can organize all your invoices and bills that are relevant to your taxes. Also, a professional might know where to go to get another W-2 form, or how to get another copy of a 1099.

If you have a professional doing your taxes, that person can go through your records and pick out the relevant expenses and income that should go on your return. Getting an audit can be easier to deal with knowing that some professionals will have some sort of audit defense service where they will go in front of the IRS with you for a fee.

Doing your taxes on your own should be a relatively easy venture. However, making even a minor mistake can wind up with you getting an audit of some sort. Missing a deduction, or not claiming all of your income due to poor record keeping, or thinking you could pull one on the IRS, can be even worse. If in doubt, go to a professional for advice.

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Save on Tax Preparation: File Your Own Taxes

Tax preparation can be costly so save money and try doing your taxes yourself. Tax preparation can cause you hundreds especially if you opt for an expedited refund. Filing your taxes yourself is easy with the help of the Internet. Several tax preparers offer online tax services in which you can file your taxes for very little if anything at all. Depending on your income, you may even qualify to file your federal taxes for free.

Where is my W-2?

By the end of each January, employers must mail your W-2 wage information to you if you are a wage earner. If you are self employed, you will not have a W-2 form. Other tax forms, such as 1099s, you may receive for other income such as investments, retirement, or contract work. If you do not receive your W-2, contact your employer or the IRS. The IRS can send you a Form 4852 with your income information on it to complete your tax returns.

How to Begin Your Tax Returns

Begin filing your tax returns by deciding whether you are going to complete paper forms or file electronically using an online tax preparer such as TurboTax, TaxAct, H &R Block or IRS FreeFile.

Gather all income forms such as W-2s and 1099s. If you are married and filing together, you will also need your spouse’s W-2 and 1099 forms. To begin filing your tax returns, you will need basic information such as your name, address, phone numbers and social security number. You must decide how you are filing your taxes such as single, married filing separately, married filing jointly, or head of household. Each filing status has requirements and if you are using an online tax preparer it may help you decide which filing status fits you the best.

Standard Deduction vs. Itemize Deductions

After entering your income information, which will come directly off of your W-2 and 1099, you must decide on whether you will accept a standard deduction or itemize your deductions. Your standard deduction is an allowable deduction from your taxable wages that the IRS allows conditional on your taxation filing status. Dependent on your actual expenses and allowable tax credits, a standard deduction can possibly be beneficial. To determine which deduction you prefer to file, review your allowable deductions and tax credits. Charitable donations, legal fees, prior taxes paid, tax preparation fees, student loan interest paid, educational expenses, job-related expenses not reimbursed, childcare costs, as well as volunteer time are all allowable deductions and tax credits that can reduce your taxable income.

If these deductions and tax credits are more that the standard deduction the IRS allows, it is more advantageous for you to itemize. But, be careful because those that itemize deductions are more probable to be audited from the government. Ensure you have receipts for all expenses you deduct. If you are audited and do not have receipts for expenses you claimed, the IRS can adjust your return which could cost you thousands of dollars in taxes.

IRS: Publication 501: Exemptions, Standard Deduction, and Filing Information.

http://www.irs.gov/publications/p501/ar02.html#en_US_2010_publink1000221074

IRS: Eight Facts About Filing Status

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FreeTaxUSA and The Amended Tax Return

As the April deadline approaches and you have already sent your tax return in the mail to the IRS or you have completed a return on the computer, the only way to change the tax return is to file an amended tax return. If you have filed with FreeTaxUSA, you can sign in with your account and correct the return.

The Internal Revenue Service does not let you do an e-file amended return.  Your only choice is to prepare and send back the amended return.

If you completed your original tax return through another source besides FreeTaxUSA, you can go to the website for the IRS and use form 1040X to manually do an amended return. If you would like to use FreeTaxUSA, just enter all of your tax information.

It is recommended that a person not amend their tax return until they have received their refund or paid their taxes.  Often times, the IRS will automatically correct any errors, in which case, you do not need to amend anything.  The IRS sends a notice as to the adjustments that were made or asks for more documentation.

Tax forms can be tricky at times.  With the misplacement or miscalculation of one number throwing many things off.  When this occurs you must make every effort to correct the mistake through an amended tax returnSoftware from FreeTaxUSA makes this process as well as your initial tax filing easy.  Tax returns do not have to cause headaches.  Careful preparation is key.

IRS Revokes Nonprofit Tax Exempt Status

The Internal Revenue Service (IRS) has made changes to the nonprofit tax exempt status of agencies that are not for profit in the 445 area who have not filed required tax forms for three consecutive years now. This move has made it impossible for donors to claim deductions on their federal income taxes 2010 for donations given to these organizations.

About 275,000 local agencies all over the country have been affected by this IRS policy move, though according to the federal agency most of these agencies are not operating. A list of the affected agencies is available on the revoked list at Representative Chuck Shumer’s website. However some of the agencies listed are operating and according to them, they have been filing all the paperwork required. So work needs to be done to clarify who is tax exempt and how has lost their tax exempt status.

Unpleasant Surprise

Among these agencies include the Plattekill Public Library, New Windsor Little League, University of Michigan, Woodstock Area Meals, George Washington University and the Islamic Center in Washington D.C. According to these agencies, they have been filing their returns and their tax forms are up to date. They were all surprised when they found themselves on the list.

Why the List is Necessary

The 2006 Pension Protection Act claims that these organizations earning less than $50,000 should file their tax information. Cleaning up the list will increase tax revenues during a time when the US government is in need of increased revenue to help balance spending.

Assisting Potential Donors

The revocation is supposed to eliminate agencies not in operation. Donors can have a clear picture of existing agencies. The IRS had made attempts to reach out to all agencies but most of the organizations claimed that they did not get any information. What is puzzling for organizations is that copies of tax forms can be found on the Guide Star website filed in 2009.