A famous American statesman from the seventeen hundreds once said that nothing in this world is certain except for two things—death and taxes. This statement made decades ago is still valid now. Taxes will be something constant in the life of individuals and businesses. This is why having financial literacy is essential, especially if one wishes to embark on a self-employment path.
Self-employed individuals are lucky these days; technology has made it easier to run their own business. Payments can be made online, contracts can be sent immediately, and accounting software and other calculators are easily accessible should one need to do estimates and an accountant isn’t instantly available.
It’s not easy to run a business yourself, so if you need help with your business, here’s a basic guide on tax write-offs for self-employed individuals.
On Self-Employment
The road to a successful self-employment experience can be pretty daunting. Self-employed individuals who earn their living as independent contractors, members of a partnership involved in business, trade, or otherwise sole proprietors, have to be ready to take on all the roles needed for their practice.
Every business must file and pay taxes regardless of the business structure they follow, and this includes self-employed individuals. This means learning the skills they need to operate like any typical for-profit business would, which includes understanding how to properly report financial information and taking advantage of tax write-offs that can lower the tax liability of your practice.
What Is A Tax Write Off
Tax write-offs are expenses deducted from the total revenue of a business to determine the total taxable income. Knowing how to take advantage of these write-offs can help lighten your burden as a business owner.
Self-employed individuals typically do their accounting and taxes with the help of experts – like an accountant or tax preparer, or rely on their resourcefulness by using a self employed tax calculator to estimate their tax obligations.
Technology and collaboration with experts can help you understand your tax liabilities. Still, it’s also essential to know how to qualify expenses early on should you wish to do your accounting and tax preparation yourself.
How To Qualify Expenses As A Deductible
It is crucial to remember that you need to qualify expenses before you can include them in your tax write-offs. An expense should make sense and align with what you do as a business to be qualified.
For example, buying a high-end camera is acceptable and legitimate for someone in the photography business, but not for a programmer.
For typical companies, tax deductibles are pretty straightforward. It’s, however, quite tricky for a self-employed individual since there are particular things you can pay for that can be categorized as both a personal and business expense.
For example, a self-employed social media practitioner who buys a new cell phone can include the cost of the mobile phone in their business expenses because they use it 80% of the time. And since this phone is not 100% just for business, they can only claim 80% of the cost.
Expenses You Can Include In Tax Write-Offs
Business expenses are any expenses purchased to help run a business for profit. To qualify these costs for a write-off, these expenses should have a legitimate purpose for a company’s operations.
Some examples of deductibles for a self-employed individual can include:
- Rent and Lease
- Car and Truck Expenses
- Advertising
- Education and Training
- Office Supplies & Postage
- Supplies
- Miscellaneous (bank fees, wages, etc.)
- Employee Benefits (such as health insurance)
- Business Insurance
- Travel
Common Pitfalls To Avoid
As a self-employed individual, keeping everything in order may be a daunting task. And, to avoid any issues from brewing, it’s best to know these common pitfalls you need to avoid early on.
The most common mistake self-employed individuals can make is not separating personal and business receipts. If you wish to avoid headaches, having an organized filing system is necessary.
Another mistake one can make when running a business is getting rid of receipts prematurely. Records and documents connected to finances should be kept for seven years. Keeping digital backups of these files can help you have peace of mind.
Lastly, not knowing what expenses to include in tax write-offs can also be problematic. This is another factor that the government can use to audit your business. It’s essential to understand how to qualify your expenses to avoid any operational disruptions.
Preparation Is Key
Self-employment can be pretty exciting as you get more control over who you work with, when to work, and how much to charge your clients. These benefits, however, come with more responsibilities. The key to avoiding problems from snowballing is to be prepared. Arm yourself with knowledge so you can be financially literate and sidestep simple but avoidable business problems.
