People incur tax debts for a variety of reasons. Sometimes wage earners get into trouble by claiming too many exemptions on Form W-4, which results in too little tax being withheld for the federal government. Sometimes people don’t understand the tax consequences of certain transactions; they see their job as their only source of income and fail to consider other taxable events such as debt forgiveness or retirement account distributions. But a huge percentage (probably the vast majority) of people with IRS problems are the self-employed. The self-employed typically get into trouble when they either fail to make estimated tax payments or when they claim invalid/excessive expenses which results in “underreported income.”
Today the IRS offers tips for self-employed taxpayers that will keep them out of hot water:
- You may be self-employed even if you don’t consider yourself “self-employed” so be careful!
- File a Schedule C to claim your business/self-employment expenses and reduce your taxable income
- Pay self-employment tax (Social Security and Medicare) as well as income tax
- Make estimated tax payments throughout the year so you don’t have a large bill that you can’t pay come April 15th. See form 1040ES.
- Check to be sure you can deduct the entire business expense or if it must be capitalized
- Business expenses are allowable only if they are both ordinary and necessary