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Directbanc.com Goes In Depth with the Personal Finance Experts and their Personal Finance Blogs. Today marks the debut of our “Asking the Experts” series of interviews with the best Personal Finance Experts from around the web. Our goal is to provide helpful information on a wide range of financial topics that affect a wide range of consumers. We begin our financial expert series with the wonderful personal finance blogger Carrie Smith. Carrie Smith is the writer behind the Careful Cents personal finance blog. She’s a Certified Bookkeeper and Tax Consultant who loves to travel. She’s also a career junkie, social media addict, debt hater and food lover.
1. When considering the option of becoming self-employed, what are three tax implications that must be taken into consideration?
• Self-Employment tax. One of the first things most SE (self-employed) workers know, is they are responsible for their own taxes. However, they don’t often realize they have to pay their own social security and medicare taxes, in addition to income tax. On the tax return it’s called the SE tax.
• Avoid becoming a hobby. If you truly are a SE person, you need to show a profit in 3 of the last 5 years of starting your business. The IRS may not allow continuation of deducting a loss if they determine you aren’t making money. They will classify your business as a hobby, so you need to turn a profit fairly quickly.
• Keep immaculate records. When you start working for yourself, you’ll be wearing lots of different hats. The boss hat, the receptionist hat, the bookkeeper hat, and etc. It can be a lot of work for one person to do at first. If you don’t think you will be able to keep immaculate records, consider hiring someone to help. The IRS really watches tax records for self-employed taxpayers, so you want to keep very clear and precise records of income and expenses.
2. In your opinion, what is the best way to keep track of your earnings when doing freelance work, so that you have the correct records for tax filing?
I like to use an online financial program to track all my earnings and expenses. I also combine everything into an Excel spreadsheet for added accuracy. Most small business or personal finance software is free and comes with an app, for transactions on the go.
3. Estimated taxes can be a confusing topic for the self-employed. Could you give us an explanation of estimated taxes and how they are paid throughout the year?
For people who receive W2′s every year, taxes are withheld from each paycheck. As a freelancer or self-employed contractor, you are responsible for your own taxes on a quarterly basis. The government requires taxes to be paid, as income is earned. At the end of each quarter, you need to pay 1/4 of the tax due on your income, which is roughly about 20-30% of your earnings for the entire year.
4. Getting audited by the IRS is a concern for many people. In your opinion, what steps should a consumer take if they find themselves being audited?
If you find yourself being audited you should first, calmly read over the notice or letter you received. In most cases it will have instructions or step by step directions of what you need to do. Next, talk with a Tax Attorney or Enrolled Agent. They are the only people certified to represent you in front of the IRS, regular Tax Professionals and CPA’s are not. Don’t panic if you don’t understand the situation, just keep asking questions and stay involved throughout the process.
5. I’ve heard companies advertise they are specialists at “tax resolution.” Exactly what services do tax resolution companies perform?
Legit tax resolution companies, become advocates in cases of audits or discrepancies with the IRS. They can offer help with filing back taxes, avoiding IRS harassment and settling outstanding tax debts. Be sure to check their credentials to verify their training and information is up-to-date.
Questions about the topics discussed today?
Visit Carrie at Careful Cents Blog to learn more!
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