formerly FinancialForce
formerly FinancialForce
Being your own boss has a lot of appeal for many people. If the idea of working from home or starting your own business sounds attractive to you, there’s no reason why you shouldn’t pursue these entrepreneurial dreams. But as much as you can enjoy this type of professional freedom, there are some specific responsibilities that come with being your own boss. You’ll need to keep detailed financial records for your business and income, and these records need to be kept separate from your personal finances. There will also be special income tax requirements for you as a self-employed professional.
To manage your business successfully and ensure that you satisfy all income tax obligations, track your income and expenses carefully. All income you bring in professionally needs to be reported to the Internal Revenue Service. You will also have various business-related expenses, which you can write off for your business. Examples of expenses include business advertising, supplies and materials, office space, travel and mileage, and wages paid to employees. Keep detailed records with receipts for all expenses that you claim on your income tax return.
It may be tempting to combine your personal and professional accounts, but this can create confusion when it’s time to reconcile your finances. Optimally, you should open a separate business bank account to use for all business transactions. This will simplify your business financial records significantly. A separate business bank account also makes it easy to glance at your account balance at any time so you can see your funds available. Budgeting and planning for future purchases is much easier with a business account.
As a self-employed professional, you need to be familiar with various financial documents and forms that you will likely use in your business accounting. Form W-9 is a form you will send to clients and vendors under contract with you to establish that you’re working as a separate business without having taxes withheld from income. Form 1040 Schedule C reports profits and losses from a business on an annual income tax return. Use Form 1040 Schedule SE to calculate self-employment tax, and file this form with your annual income tax return. If your self-employment income requires you to pay quarterly income taxes, you’ll do so with Form 1040-ES. If you’re a freelancer, you may also receive 1099 forms, which are the equivalent of W-2 forms.
Most people find income taxes at least a little stressful, and self-employed professionals often feel even more stress where taxes are concerned. When you work for someone else, you earn wages and the taxes and payments you owe are withheld automatically. When you don’t get a paycheck from an employer, you still owe these taxes and payments, but nothing is deducted from your earnings. You’ll need to pay self-employment tax, federal income tax, and state income tax based on your taxable income. Some self-employed professionals file an annual income tax return, and others have to estimate their tax liability and pay quarterly taxes. The Internal Revenue Service requires self-employed individuals to estimate quarterly tax payments if they will owe more than $1,000 in federal income taxes and if withholding and refundable credits will cover less than 90% of the tax liability for the current year or 100 percent of last year’s liability, whichever is less. The best way to manage your income tax responsibility is to plan ahead and save for tax payments. Try to save between 25 and 30 percent of your income for taxes.