Self Employed and Filing? Avoid Making a $34,000 Mistake

Posted by Admin

With April 15 rapidly approaching, don’t be surprised if the groans you hear from the nation’s 22 million self employed are getting louder. That’s because micro-business owners and the self employed must estimate and pay their own Social Security and Medicare taxes and file additional paperwork.

“The number one issue is the overall complexity of the code. There are so many hoops to jump through, it is extremely difficult to keep up,” says Keith Hall, Chief Operating Officer for the National Association for the self employed (NASE), a DC-based nonprofit organization that advocates for the self employed.

Even U.S. Treasury Secretary Timothy Geithner failed to pay $34,000 in self-employment taxes while working for the International Monetary Fund between 2001 and 2004. According to Senate Finance Committee documents, Geithner paid more than $8,500 in interest. That’s an expensive mistake!

Here are some tips for what you can do right now to avoid making costly mistakes of your own while keeping more of your hard-earned money.

1. Give yourself extra time and don’t take shortcuts

It’s so easy for people to wait until the last minute to file their taxes, Hall says. Take the time to figure out your tax preparation strategy. Whether you use TurboTax or consult a professional, don’t just do the same things you did last year without making necessary changes. (For instance, don’t just use the same number of business miles from year to year.)

2. Consider talking to a professional

In general, whenever there’s a change in your situation, that’s the time to sit down with a tax professional, Hall says. If there’s a change in your income, or this is the first year you’re filing as self employed, then you should consider getting advice. Even if you prepare your tax return yourself, you can always have someone review it, Hall suggests.

3. Don’t miss commonly overlooked deductions

You probably already know that you’re eligible to deduct the costs of operating a car for business purposes and that the IRS uses mileage rates to help determine those costs. But did you know that you may also deduct parking fees and tolls paid while using your car? (You can’t, however, deduct expenses of automobiles for hire, like shuttles or taxis.) For 2009, the standard mileage rate is 55 cents per business mile. In 2010, that drops to 50 cents per mile.

4. Don’t be afraid to take the home office deduction

It’s a common misconception that if you have a complicated form for a home office deduction, that might trigger an IRS audit, Hall says. “Certainly the more complicated returns may be looked at by the IRS, but the key advice is that if there’s a deduction you’re eligible for, do the deduction,” Hall adds. If you operate your business from home, you may be able to deduct the business portion of real estate taxes, insurance, utilities, rent, mortgage interest, and even painting and repairs.

5. Make a contribution to your retirement fund

According to Hall, the biggest overlooked deduction is the option for a retirement contribution. You can take a tax deduction for contributions you make to a self-employment retirement fund, such as the SEP-IRA. For 2009, annual contributions to the SEP-IRA must be less than either 25% of an employee’s salary or $49,000.

“Most people are employees. They get a paycheck and the company withholds money for their taxes. The self employed has the extra burden of paying both halves,” Hall says. “If you don’t take the deductions, it’s almost like you’re paying the IRS not to take them.”

More Resources:

FiLife contributor Belinda Yu has written on a number of topics for Reuters, CBS, and has also worked in broadcast production for CNN. Her work has appeared in The Milwaukee Journal-Sentinel, The Boston Globe and The Washington Post. She earned her M.A. in Journalism from Stanford University.