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In an interesting twist that reveals confusing nature of tax code, you are allowed a partial deduction for self-employment tax. Simply put, you are allowed to deduct one-half of your self-employment taxes from your gross income. For example, if you pay $10,000 in self-employment taxes, you are allowed a deduction on your 1040 return of $5,000. Many self-employed individuals miss this deduction and pay more money to taxes than needed.
Health Insurance Deduction
This used to be a very messy area for self-employed individuals, to wit, you received little tax relief when it came to your health insurance bill. This was a particular burden for small business owners when considering astronomical cost of health insurance. All of this has changed and you now may deduct 100% of your health insurance costs as a business expense.
No Withholding Tax
Unlike a salaried employee sitting in a cubicle, you are not subject to withholding tax on your paycheck. While this sounds great, you are required to make quarterly estimated tax payments. If you fail to make payments, you are subject to a penalty, but penalty is not biggest concern.
A potential and dangerous pitfall of being self-employed is failing to pay quarterly estimated taxes and then getting caught at end of year without sufficient funds to pay your taxes. The IRS is not going to be happy if you fail to pay your taxes and you will suffer consequences in form of penalties and interest. Making sure you pay quarterly estimated taxes helps avoid this situation and it is highly recommended that you follow this course of action.
You must maintain complete records of all business income and expenses. Simply put, document everything. Create a filing system for each month and file every receipt, etc. All business travel expenses must be documented, including auto mileage you incur when performing business tasks. Office supply stores sell business mileage books that you can keep in your car and use whenever you travel. If you have any doubt about documenting something, just do it!
As a self-employed individual, your focus and time is spent on making your business successful. Your focus is not on complexities of tax code and how to limit amount of taxes you owe. If any of information in this article is new to you, then it is highly likely you have paid far more in taxes than required.
Richard Chapo is with Business Tax Recovery - Obtaining tax refunds for small businesses for overpaid taxes. Go to our article section to discover tax strategies and deductions.