We can whine and moan all we want, but income taxes aren’t going to disappear. Here, you will find out everything you need to know as a small business owner, so you can feel confident that you are filing your US income taxes correctly.
1. What is a sole proprietor?
A sole proprietor is the owner of a business who is exclusively entitled to keep all profits and exclusively liable for all losses from the business. Most freelance photographers are automatically sole proprietors. Sole proprietor just means that you have not legally filed your business as a corporation or other entity type. Your profits are taxed on your personal tax return; you do not need to file a separate tax return for your business. As a sole proprietor, you are responsible for withholding and paying income taxes and self-employment taxes, which is normally something an employer would do for you.
2. If I’m a part-time photographer, how can I file my taxes?
Unless you have created a separate legal entity for your photography business, you will report your photography income and expenses on Schedule C. The Schedule C is filed along with your individual income tax return (Form 1040) and calculates your profit or loss from a business. If your business is an LLC, corporation or other business entity, a tax return separate from your personal tax return would need to be filed. You may want to consult your tax professional for more information about your specific filing requirements.
3. How can I get organized before filing my taxes?
It is important to keep accurate records for your business. One good approach to make filing your taxes easier is to keep a business bank account and/or credit card that is separate from your personal finances. If you do this, it will be easier to compute your business expenses when tax time comes. In addition, it is important to keep your receipts with details of your business purchases. On your tax return Schedule C, you will need to break your business expenses from the year into categories like advertising, travel, supplies, etc.
4. Do I need to worry about self-employment tax?
If your net earnings from self-employment are $400 or more during the 2014 year, you are required to pay self-employment tax. Net earnings is your total income from the business less all business-related expenses (including taxes paid). Self-employment taxes are contributions to Social Security and Medicare system. A normal employee makes these contributions as deductions from their paychecks, and sole proprietors must make these contributions when paying their taxes.
5. When tax time approaches, what are the most important things to consider?
There are a number of common deductible business expenses that many sole proprietors may forget. For instance, if you use your personal car for your business, you can deduct some of the costs. The most common way to do this is to keep a log of all business-related car travel. The IRS puts out a standard mileage rate to figure the deductible costs of operating your car for business purposes. Note that the usual cost of travel from home to your office or studio is not deductible.
In addition, any fees you pay to consultants, lawyers or tax professionals relating to your business are deductible. If you use credit to finance business purchases, all fees and interest paid are tax-deductible. If you take a current or prospective customer out for a meal or entertainment, 50% of the cost is deductible if it is directly related to the business and business is discussed at the event. If a customer fails to pay for goods sold to them, you may deduct the cost of the goods as a bad debt deduction.
6. What write-offs or deductions should I include?
On your tax return you will report the costs of doing business against your income from the business. The amount you are left with is your gross income, and this is what you are taxed on. In order to keep as much money in your pocket as possible, you want to deduct all allowable business expenses. According to the IRS, you may deduct business expenses that are ‘ordinary and necessary.’ While the IRS has not fully defined what is ordinary and necessary, it is generally easy to determine if an expense is deductible. For instance, a purely personal trip to Hawaii should not be claimed as a business expense. However, the costs of operating your business, product and advertising costs, and some of the cost of business-related meals are deductible.
7. Should I hire an accountant come tax time?
Depending on the complexity of your business and the amount of effort you want to spend on filing your taxes, you may want to hire an accountant to help you. If you stay organized and keep your business separate from your personal finances, filing taxes doesn’t always have to be time-consuming or stressful. Consulting a tax professional could be a valuable resource for your business to help with financial planning and tax requirements.
8. What else do I need to know about filing taxes as a freelancer?
If you make a profit as a freelancer, you may be required to pay estimated quarterly taxes. Since you don’t have an employer who is withholding income taxes from each paycheck, it is important to understand your tax liability. As a sole proprietor, if you expect to owe $1,000 or more in taxes for the current year, you may be required to make tax payments throughout the year.
Disclosure: This post is for information purposes only. Zenfolio encourages you to consult your tax professional for specific tax issues regarding your business.