With so much happening in the world right now, it’s easy to forget about taxes. Even though you have a 90-day reprieve to pay your taxes, you still have to file them by April 15.
That means that you need to continue as if its business as usual and get your taxes filed and ready to go. If this is your first year filing tax returns as an entrepreneur, understanding tax returns can be challenging.
It’s a different world when you file taxes as an entrepreneur. Read on to learn how you can understand your tax return and make sure your taxes are done correctly.
The Required Tax Forms
When you had a job, you had a W-2 form from your employer that detailed your earnings and tax withholdings. You’d then fill out Form 1040 and Schedule A if you itemized your deductions.
You don’t have a W-2 form as an entrepreneur, so you have to tally up your business income and expenses.
Assuming that your business is registered as a sole-proprietorship or a single-member LLC, your personal taxes and business taxes appear on the same tax return.
If you have an S-Corp and you draw a salary from the business, then you’ll file two separate returns, one for the business and one for your personal returns.
Since most small businesses are sole-proprietorships, this guide will focus on that scenario.
As a sole-proprietorship, you will have to fill out Form 1040, which will be for your personal income tax return.
You’ll also have to fill out Form Schedule C, which details your business income and expenses. You’ll need to gather your income statements and all of your receipts from the past year to fill these forms out.
Calculate Your Income
Your first step in your taxes is to calculate your gross income for the year. This will include business income, investment income, and any gambling winnings over $600.
If you had past debts settled for an amount over $600, that needs to be reported, too.
Self-Employment Taxes
One of the harshest realities for small business owners is that they have to pay self-employment taxes. You have to pay 15.3 percent in Social Security and Medicare.
If there’s a price to pay for the freedom of being your own boss, this is it.
Deductions and Tax Credits
One of the advantages of having your own business is that you get to write off your business expenses. Those are claimed on your Form Schedule C. Some of the most common business deductions include advertising, office supplies
Home Office Deduction
One overlooked and misunderstood deduction is the home office deduction. This is a deduction that allows you to deduct a percentage of home expenses that were used for business.
The important part here is that the space used in your home is used only for business purposes. That’s usually in the form of a spare bedroom.
Self-Employment Tax Deduction
Yes, you have to pay 15.3 percent of your income in self-employment taxes. On the bright side, there’s a line item on Form 1040 that allows you to deduct half of your self-employment taxes, which can lower your tax bill.
Standard Deduction Or Itemize Deductions
On your personal taxes, you have the option to take a standard deduction or itemize your personal deductions like mortgage interest.
Most taxpayers will take the standard deduction since the standard deduction was raised when the Tax Cuts and Jobs Act was passed.
Once you take your gross income and subtract the business expenses, deductions, and tax credits, you’ll arrive at your adjusted gross income. This is the amount that your income tax is based on.
What Are Tax Credits?
You may be eligible for tax credits like the lifetime learning credit or earned income tax credit. A tax credit is a dollar match that is subtracted from the income taxes owed.
That’s different from a deduction because a deduction just lowers your adjusted gross income.
Understanding Taxes In A Global World
There are a couple of other confusing parts of American tax law. For example, if you are an ex-pat and reside elsewhere in the world, you still have to file your taxes in the United States and in the country where you reside.
There are many people who are digital nomads and live in places like Singapore or Europe while working as a freelancer. If you’re one of them, you’ll file taxes where you live. You’re likely to pay taxes into the system where you have residence.
Now, the U.S. requires that you file taxes as a U.S. citizen, no matter where you reside by June 15. You may get a tax exemption on a certain amount of income taxes, but if you owe taxes, you need to pay by April 15.
It’s important to remember that you’re still responsible for self-employment taxes, no matter where you live. You’ll want to check with a tax professional that understands ex-pat taxes and what your responsibilities are.
If you have an international business that does business in Singapore, you’ll need to be concerned about taxes in the U.S. and Singapore. You’ll want to find company tax return preparation services in Singapore to handle taxes on that end
Understanding Tax Returns Isn’t Easy
The tax code is long, and it’s not easy for anyone to understand, including tax professionals. Laws constantly change and it’s hard to keep up.
Understanding tax returns isn’t easy for entrepreneurs, because you have so many more items to include on your tax forms. You need to have a detailed account of your business expenses, which can lower your income and taxes owed.
You also want to make sure you take the tax credits you can use to lower your tax burden even more. These deductions are very helpful because you have to pay self-employment taxes.
Be sure to check out this site often for more helpful business tips just for entrepreneurs.
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