Simplified Tax Guide for the Self-Employed

self-employed-worker.jpg

Venturing into a new business can be exciting and fun, but there are certain obligations that you have to fulfill before officially starting this new chapter in your life. Whether it’s a car finance, a car wash, or a new boutique, there are certain steps that you have to follow, especially when it comes to taxes and the government. It can definitely get confusing at times, which is why we are here to guide you through your journey.

Sole Proprietor (Sole Trader)

Every business owner needs to understand that the amount of tax that they pay depends on the business’ structure. As a self-employed individual/business owner, you have to understand that you are liable for your own tax debts. You have no accountant to take care of it, unless of course you decide to hire one, which would only add to your expenses. Note that there won’t be any division between your personal and business expenses, unless you make one, for example, by maintaining a separate bank account for each. This may also help with liability protection however, not being a lawyer this is a general observation and not actually legal advice. If you have the time and you are willing to exert the effort, then you can track and claim a range of deductions and expenses for your business on your personal tax return.

Goods and Services Tax

If you are earning more than $75,000 a year, then you have to be prepared for the Goods and Services Tax or GST. Both companies and sole traders are required to pay the GST, so you should always make sure to have some cash in hand. This does not apply to US based companies at this time, although it has been proposed for future legislation.

Reduce Your Tax Payments

Luckily for sole proprietors, there are certain ways to reduce their tax payments. You can claim a deduction for most of your business expenses, as long as it is strongly and directly related to the generation of revenue by your company. Also, if you are a sole proprietor, then you are entitled to offset business losses carried forward against other income. Please note though that you would not be able to choose which year you can claim your deduction. It would be wise to calculate your own profit and loan too, so you know when to file for a claim and how much you will be receiving. There are specific rules for doing so – you can see these here on the IRS website.

Reportings and Requirements

As a sole proprietor, you will most likely encounter the Business Activity Statement or BAS (outside the US). This needs to be submitted every quarter and must include details on how much money you have made, if you owe any goods and services tax and how much of it you owe, how much the taxation office owes you (if applicable), pay-as-you-go installments (if applicable), as well as other tax obligations your business might have. If you are inside the US you most likely should be making quarterly estimated payments on your income since there is no withholding. You may also have to report sales and use tax which is different for each state. <See: State of MN Sales & Use Tax>

Your FEIN, ITR, and State Filings

When starting your business, you need to file with the state you are operating in for a Tax ID. Go to your state’s Secretary of State page for more details. You also need to file with the Federal Government as well to obtain a FEIN or Federal Employer Identification number. If you are not in the US you must to lodge your income tax return with the taxation office before you even start running your business. To be able to do this, you must use your TFN or individual tax file number.

Pre-Paying Your Tax

You can always opt to pre-pay your business’ tax during its first year. If you cannot pay in full, then paying voluntary installments would be the best choice for you. This way, you would not have to worry about paying hefty amounts of taxes for the next few months.

Reporting Online

Almost everything can be done online today, including business reporting. This is extremely convenient especially to busy business owners, as with just a few clicks, your work will be done. Most state websites are user friendly and will have contact information if you get stuck. Likewise the Federal filings are generally set-up to do it yourself without the aid of a real person. Internationally, reporting your income tax return including your claim expense, superannuation deductions, your BAS, and your business and personal income can all be done online. Tracking your GST and preparing your BAS for lodgment can also be done online.

Starting your own business can be a lot of work, and it can get exhausting at times. However, once you get the hang of it and you start seeing results, you will realize that all of your hard word was well worth it!

Phillip R. Christenson

Office, 3131 Fernbrook Lane N., Suite 224, Plymouth, MN 55447, USA

Phillip Christenson is co-owner and financial advisor at Phillip James Financial, a Fee Only Financial Planning & Investment Management located in Plymouth Minnesota and serving the surrounding suburbs. He has been published and quoted in many national publications such as the Wall Street Journal, Chicago Tribune, Investopedia, etc.