Being self-employed is quite possibly one of the best tax strategies available today. Unlike being an employee, freelancers are in full control of their financial and tax situation. But independence also comes at a cost. Independent contractors face higher taxes and more record keeping duties than employees.
The IRS is undeniably suspicious of self-employed persons. The IRS routinely audits freelancers, often looking for unreported income or overstated deductions. The IRS seems to be particularly on the lookout for individuals who (1) have high wages, and a correspondingly high business loss, or (2) have business losses year after year, or (3) self-employed persons whose income seems low in comparison to similar professionals. If you are in one of these situations, you need to start thinking about how to protect yourself in case the IRS audits your tax return.
The basic tax planning for self-employed persons begins with understanding how freelancers are taxed, which is substantially different compared to how employees are taxed. Independent contractors are taxed on their net self-employment income (that is, net after various business expenses have been deducted from their gross business revenues). Independent contractors have two separate federal taxes applied against their net income: the income tax and the self-employment tax. Also, self-employed persons generally do not have taxes deducted from their pay (unlike employees), and so need to remit tax payments periodically throughout the year in the form of estimated taxes. A typical tax planning strategy for freelancers begins by keeping track of income and expenses, calculating estimated taxes, and then making any financial decisions that might reduce taxes to a desired level. Financial decisions which seem to have the most impact on tax planning for freelancers is picking a retirement plan and funding level and optimizing depreciation deductions (which have several possible permutations).
Getting Organized and Record Keeping
Home Office Deductions & Depreciation Strategies
Reporting Your Net Profit & Paying Your Taxes
What to Do if You have Business Losses
Think About Incorporating Your Business