February 21, 2014
Calculating income taxes is a royal pain, even when your situation is uncomplicated enough that you can file a 1040EZ Form. And if you're self-employed, be prepared for extra layers of complexity. Not only must you file an annual return with numerous additional forms and schedules, you're also responsible for paying quarterly estimated taxes, which can mean having to write a pretty hefty check while waiting for your clients to pay their overdue bills.
Add in that you're also responsible for funding your own health insurance and retirement and you may start to miss having an employer manage a portion of your financial affairs. (Although many people go into business for themselves precisely to call their own shots.)
Here are a few things to remember when calculating your 2013 taxes:
First, some potentially good news for taxpayers who claim a home office deduction: You now may choose between the traditional method of calculating the business use of your home (which involves numerous calculations, filling out the onerous IRS Form 8829 and maintaining back-up records for years) and a new simplified option.
Under the new, so-called "safe harbor" method, you can simply claim a standard deduction of $5 per square foot for the portion of your home used regularly and exclusively for business, up to a maximum of 300 square feet – a $1,500 limit.
Contrast that with the traditional method where you must calculate actual expenses of your home office expressed as a percentage of the square footage your home office consumes. For example, if your office takes up 12 percent of your house, you can deduct 12 percent of your electricity bill.
A few additional details:
You'll need to weigh whether the recordkeeping hours you save justify the potentially smaller deduction – especially if you have a large home office or considerable deductions. Suggestion: Look at last year's deduction and compare what it would have been using the $5 per square foot calculation, factoring in time spent doing the math.
A few other self-employment tax-filing considerations:
Bottom line: Income taxes are often more complicated for self-employed people and good recordkeeping is essential. Unless you're an accounting whiz, consider hiring a tax professional or financial planner who specializes in self-employment issues. The penalties and fees they can help you avoid – and hidden deductions they can uncover – will probably more than pay for their fees.
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