What is your tax status when you run a home business?
Filing taxes can be frustrating, nerve-racking, and time consuming enough. It can be even more difficult when filing for your home business because some may be confused on their status, what to report, and what forms must be filled out. So what is your tax status when you run a home business? Here are some guidelines:
Most people who run a home business will file as self-employed. According to IRS.gov, a person can file as self-employed if they are in business for yourself, a sole proprietor, or an independent contractor. The IRS site also says that you can consider yourself an independent contractor if you decide what will be done and how it will be done (you can still consider yourself an independent contractor if the person you're working for controls or direct the result of your work). Also, if you have a home business in addition to your regular job, you can file with a self-employed tax status.
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Be sure that you are a sole proprietor before you go to all the trouble of filing and doing the extra paperwork. If you are being paid by another employer, corporation, or are part of a partnership, you are not a sole proprietor. You cannot consider yourself a sole proprietor if you own property that is being rented out.
If you meet the right requirements for the self-employed tax status, there are certain filing requirements that must be followed. Home businesses that make over $400 a year are required to pay a self-employment tax - this is paid by filling out and attaching Schedule SE with the 1040 form. Also, all business income and expenses must be reported on a Schedule C form.
You can file your taxes the old-fashioned way, with the paper forms, a pen, and a calculator. This way can be pretty stressful, especially if you are filing with a self-employed tax status. Depending on how big your home business is, other options might be better.
If you have a lot of deductions that you want to report or employees that need to be accounted for, you may want to get in contact with a certified public accountant (CPA) that specializes in small businesses. They are very familiar with the various deductions that are available to the self-employed. Plus, with all the various tax schedules and forms, it is nice to have someone else keep that often complicated side of your business organized. There is some cost associated with a CPA's services, so hiring one should only be considered if your home business has adequate resources and a need for such.
Some home businesses are on a smaller scale, with no employees and minimal deductions. For those types of situations, try using a tax preparation service like H&R Block. They can help you with basic deductions and some of the schedules. Or, you could try preparing the taxes yourself using a tax program like TurboTax, which actually has a specific one made for small businesses. Either method, either through an office or computer program, costs anywhere from about a hundred to two hundred dollars. So, while doing the taxes yourself by hand, with pen and paper, is the least expensive way up front, in the end, having some kind of assistance, whether through a CPA or tax preparation service, will save you money in the long run. This will save money and stress because they will find things you may not.
Once you understand your home business's tax status, you will be able to find the best way to handle filing your taxes and minimize your tax bill. Though the maze of forms and schedules can be daunting, a little research and work up front can save you headaches and stress in the long run. When you have the complicated tax aspect of your business figured out, the rest seems to fall in place.
