2016 Tax Preparation Guide For The Self-Employed
Working as a freelancer can be a dream for those who don’t like to punch a time clock. There’s no one to answer too and it’s a schedule where a person can set their own hours. However, all of the glitz and glamor of owning a business goes away when it comes to the yearly tax report. Regardless of whether the taxes are self-prepared or done by an accountant, it’s still important to know what deductions a business qualifies for so that proper measures can be taken throughout the year.
To avoid paying a ton to Uncle Sam, most people use a Form 1040 and use a Schedule C. One of the biggest goals of the self-employed is to write off as much as possible. The form starts allowing deductions on Line 8. Here, a write off for advertising is allocated. This will include anything that is done to promote the business. It can be business cards, printed brochures, and even a sponsorship to local community events. Anything used to promote the business should be listed here.
Car and truck expenses are often a big write-off, and the filer has two basic options. On line 9 of the schedule C, the number of miles driven for business can be entered. The IRS will times those miles by 57.5 cents and in 2016 it’s .54 cents In addition, any money paid for parking fees and other tolls can be added too. This amount goes on line 9. In section B of form 4562, the other option is to itemize expenses verses mileage. This would be the costs of gas, insurance, repairs and other car-related costs. It is usually much more advantageous to the bottom line to claim the mileage over actual expenses.
As a self-employed business professional, it is often necessary to hire other freelancers to help out. It could be a college student who is helping to do some filing or computer work. Hiring contractors goes line 11 or employees line 26 of the Schedule C and is known as Contract Labor. Any labor that the freelancer paid for, but didn’t treat as a regular employee, would go on this line. Don’t include fees for accountants and lawyers on this line, those go on Line 17. Repairs for business equipment would go on Line 21, so it too doesn’t go in this lot. It is reserved for just the people paid to do a job for the business. See the IRS guidelines for more information in Independent Contractors.
If a business has any sort of equipment, then depreciation is going to play a big role in reducing the amount owed. This could be computers, camera, machinery and anything else that the company bought to utilize. The IRS allows you to claim the items depreciation over five years. There is an exception that will allow a business to write off the total amount up front, or they can split it up over the next five years. Line 13 is pretty self-explanatory.
As a freelance business, it is important to have insurance. All sorts of insurance premiums from auto to malpractice can be written off on Line 15. If the company pays for workers’ compensation, storm, accident and even office insurance, write it off here.
Any loans that were taken out for the business can be reported on Line 16. If there were any interest paid in the loans, it’s also recorded here. This can be for credit card debt, or mortgage interest used if taking the home office deduction. Only a small percentage of mortgage interest will apply to this deduction for home offices.
On Line 17, any legal or professional services can be written off. If there was a lawyer that did some work for the company or an accountant; their fees would be included here. It can be hard sometimes to determine between contract labor and professional services. Typically, anything other than legal or accounting goes under contract labor.
One of the ways to get some money back is office supplies. Ever pen, paper-clip, stamp, and other professional instruments can be written off on Line 18. Keep all those recipes from the year, as it can really add up to a great deal. Ink for the printer and printer paper are big expenses. Be sure to tally all that up and include it here.
Professional Equipment/Business Property
If the company leases any gear, like cars or professional equipment, then they can write it off on Line 20a. If a property is being rented for the business, then it can go under 20b, which is for other business property.
This is not typically a huge category for the freelancer. Line 21 is for those who pay for equipment to be repaired, or something of that nature. If the computer broke down and an IT professional had to come and fix it, then it would be categorized here. If something needed to be repaired in the home office, it would also go here. This category is not a big deduction area for the self-employed of a small home based business.
Supplies for Physical Products
If a freelance business produces things to sell, then they can write off the supplies on Line 22. This can be copy paper, leather or whatever else is needed to make the goods sold. The cost of the inventory doesn’t go here. Just what had to be purchased within the last calendar year should be included.
Real Estate Taxes/Licenses
Any real estate taxes or federal unemployment taxes can be reported on Line 23. A home office allows a person to put a percentage of the real estate taxes on here too, but a calculation has to be done from Line 30 to see how much to claim.
Those who travel for the business purposes can enter the costs on Line 24a. Remember to only include meals, gas, mileage and other expenses that were for actual business and not pleasure parts of the trip. Only reasonable meals count. Anything extravagant will be frowned on from the IRS.
If the office is not in the home, then a person can deduct 100 percent of the utilities. A home office goes according to a calculation from Line 30. Utilities are considered to be the phone, gas, internet and electric. This goes on line 28.
The biggest and most complex deduction is often the home office. In order for this to count on the freelancer taxes, it must be the location where most of the business work is done. The space must be only for business and nothing else. The freelancer must meet clients there regularly, do work there, or using it as a place to store or showcase inventory. The home and office must be measured and the calculations entered online. It’s wise to keep some pictures of the space, keep receipts that are associated with any claims and make sure not to trigger any red flags at the IRS with outlandish claims.
Doing the taxes as a freelancer can be quite tedious. It is better to have an accountant look over things so that there is some level of protection in the event of an audit.