The tax documents have been likely hitting your mailbox over the past week or two from your employer, the bank, and your IRA accounts. If you did some part time work or took on different consulting jobs during the year, you may be receiving your first ever 1099 for your income tax return.
If you started a business as a freelancer, consultant, or some home based business, you had the choice on what legal type of business structure (entity) that you chose. There are advantages and disadvantages among becoming Sole Proprietor, Partnership, Limited Liability Corporation, S Corporation, or C Corporation. Even if you chose one of these entities, you could still change the type of entity you have down the road.
The reality is that most of you who earned your first 1099 (assuming net income is more than $400) will file Schedule C (sole proprietor) with your first year of income. As you figure out what expenses you can deduct going through your last year’s records, here are some tips to keep your business income and expenses in order.
- Make sure you set up a business account and a business credit card. It is not a good idea to run your business expenses through your personal checking or your personal credit card. It will be confusing to someone looking at your business to understand why you would pay for business expenses through a personal account. This is especially going to be true when it comes to things like meals, entertainment, and travel.
- Keep track of all start up costs. Did you have any specific equipment, furniture, or other items that needed to be bought to start your business or necessary for you to do your freelancing job? Some or all of these expenses may be deductible to your business.
- Driving your car. Make sure you keep a log of all of the miles that you drove during the course of the year that were attributable to your business. You may actually deduct the expenses related to the upkeep of the car or the mileage which will be key to look at during tax time.
- All of your marketing costs including business cards, stationary, supplies, mailing costs, and much more may be able to be deducted off your bottom line.
- By setting up business accounts, you may have costs related to all of the operational parts of your business including attorney, accountant, and other banking costs.
- Ongoing education for your income. If there was ongoing education, continuing CE credits, licenses, and much more may be able to be deducted as well.
These expenses are not a complete list, but just a few you should look at to help minimize your bottom line in 2010.
Here Are Some Notes About Being A Sole Proprietor:
This type of entity will happen de facto if you choose no other form of entity for your business. There is no set up or filing necessary to become a sole proprietor although it is recommended that you will want to contact the IRS and your state/local tax agency to get estimated tax forms necessary as taxes will no longer be directly pulled out of your paycheck. It will be your responsibility now to determine how much tax you owe. In addition, as a sole proprietor, you will be responsible to pay both halves of the Social Security and Medicare tax where in the past you paid half and your employer paid half. Whoever pays you for your work will send you a 1099 at the end of the year which you must claim as gross income in your business. You will be able to deduct many different things attributable to your freelancer business. I recommend you buy a program called neat receipts (www.neatreceipts.com ) which can help you keep track of receipts, expenses, etc.
While the sole proprietorship is extremely easy to get up and running, one major downside is unlimited liability. Should you get sued, it is possible to go after your personal assets beyond the assets in the business. This is a major consideration depending upon the type of freelancing you are doing within your business.
Remember, the key to being able to run your sole proprietorship well is making sure you have separation of church and state. This means that you keep your business accounts and your personal accounts separate. You should be certain that you document all of your expenses, and only claim those that are truly attributable to your business. Get it all straight, and you will do what most business owners want to do which is pay as little tax as possible!
Always consult a qualified financial advisor, CPA, or attorney before making any of these major financial decisions.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.
Phone 1.800.355.9318 or 770.777.0427
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.
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