If you are self-employed, you already have plenty of financial issues to be aware of, and when tax season rolls around, your life may seem get even more complex. Hiring a professional can ease the pressure of filing your tax return, but there are still several issues that you should educate yourself about.
Your Reported Earnings May Affect Your Ability to Purchase a Home
If you are self-employed, then you have the potential to take advantage of a slew of deductions that will decrease your annual taxes. When you take these deductions, you subtract a significant amount of your income that you must report. While this saves you money on your taxes, it can also make it look like you earn a lot less than you actually do. This can be a bad thing if you are thinking of making a large purchase, such as a home, and need to secure credit for it.
While some lenders will allow you to use alternative methods to prove your income when considering a loan, many will make their final decisions based on your past two tax returns. This means that you might want to take fewer deductions for the two years before you intend to purchase a home. An even better idea is to slowly taper out your deductions to ensure it appears that your income is steadily increasing.
Most tax professionals will look for ways to make you pay less in taxes, so if you want to claim a higher income and fewer deductions, make sure to let whoever prepares your return know your intentions.
You Are More Likely To Be Audited
If you are self-employed, you are more likely to be audited after you file your taxes. This is for a number of reasons, including the potential for more errors, omissions, and cheating on taxes by freelancers and other self-employed people. If you have a higher than average income, or if your income suddenly increases or decreases, your chances of being audited are even higher.
To avoid an audit, you should make sure you file all of your forms correctly and on time. Using a professional filing service can also decrease your chances of being audited. However, you should count on being audited at least once if you are self-employed. For this reason, it is important that you keep detailed financial records. You should save paper and electronic copies of all of your business and personal financial documents for at least ten years.
It Is Likely Some Of Your Earnings Are Being Reported Twice
Over the past couple of years, the 1099-K has been causing many headaches for freelancers and the self-employed. The 1099-K is a form that is submitted by companies that process electronic and credit card payments when you earn over $20,000. Unfortunately, most of the money that is reported on a 1099-K will also be reported by whoever purchased your services on a 1099-MISC, even though businesses and individuals do not have to file the 1099-MISC if they pay through electronic means.
This means that much of your income will be reported twice. Instead of depending on your tax forms that you will receive in the beginning of the year, you will have to rely on your own records to fill out your taxes. Although the IRS is aware of this situation, the many discrepancies between reported earnings and how much freelancers actually claim on their taxes may increase the likelihood of an audit.
If any of these situations apply to you, make sure you discuss them in detail with your tax preparation specialist before they file your taxes. If you file your own taxes, you may want to seek professional advice.Share