It doesn’t matter if you work odd jobs or work full time as an independent contractor; current tax laws require you to report this income at tax time. Paying in cash does not exempt you from the law, nor does the fact that you do not “operate” a business.
People who do not operate a business simply report the total of all cash and checks as miscellaneous income on their personal tax return. Expenses are also deducted there; however, those expenses cannot exceed income. Someone who has occasional income from a hobby activity would fall into this category.
Self-employed businessmen and women report all income and expenses on Schedule C, the Small Business Tax Form. The profit or loss calculated there is transferred to your personal return. A self-employed person can use any business loss to offset personal income tax liability. For many, especially during those early years, this often drastically reduces the overall tax burden.
People become self-employed for many reasons, but the driving force for most is the desire to earn money. When you own your own business, the amount of money you keep in your own pocket depends on how well you understand the costs involved in producing that income. And for many, one of the biggest costs will be taxes.
Self-employed individuals can deduct all legitimate business expenses, depreciate major purchases, take advantage of business tax credits, research and development expenses, deduct a portion of your residence if you have a home office, and much more. And, after deducting those costs, any remaining profit can be further reduced through pre-tax benefits, business retirement account deposits, education, and a host of other items designed to keep more money in the business owner’s pocket. .
There are many ways to avoid paying taxes; when you do it legally, it’s called smart tax planning. The IRS code includes a long list of tax-free expenses that are available to individuals and business owners; you just have to know what they are and how to use them to your advantage.
It is important for self-employed individuals to realize that income tax is not the only bill charged at tax time when you work for yourself. This is also when you determine what you need to deposit into your personal Social Security and Medicare accounts.
When you are self-employed, these two taxes are collectively known as the Self-Employment Tax. As an employee, your employer must pay half of your FICA (Social Security) and Medicare taxes. When you’re self-employed, you pay for both halves because you’re now both employer and employee, and that amount can be overwhelming if you’re not prepared. And that’s where tax planning really helps.
Tax planning is the combination of projecting next year’s income and expenses, using current tax laws to increase retirement and insurance benefits, scheduling taxable events in your business and personal future, looking for tax law changes that will affect your results and calculate any quarterly tax deposits. A good tax professional not only prepares your taxes, but also helps you with tax planning as part of your annual visit.
If your tax preparer does not offer tax planning, you are not getting full value for your money and you are probably paying too much in taxes. When tax planning is done right, there are few surprises at tax time, your return is audit proof, and you have a clear picture of your financial future. And that makes good business sense.
