Self-Employed and Preparing Your Own Taxes? How to Do it Right
Tax season is upon us. Self-employed and thinking about doing your own taxes? Bob Jennings CPA, EA, CFP and President of Jennings Seminars, on tips on how to file properly
Tax software is a wonderful thing, and a terrible thing. Let’s look at some reminders when preparing your own return online, but some common sense is in order first.
Start by figuring out what you think your own time is worth per hour. Is it $10? $25? $50 $100. Let’s say you choose $25 per hour. If it is going to take you more than a few hours to do your return, go to a professional – it is cheaper in the long run, particularly when you add in the cost of your own lost time, software, state software, e-filing and worry. Second, if your return involves more complex tax issues like home office deductions, depreciation, early pension plan withdrawals or a lot of travel, go to a professional because the laws are too complex to figure out in a reasonable manner. Finally, don’t look at user boards online and then think you have “researched it on the Internet.” Tax research is not performed by rumor, blog or post; it is performed by reading the Internal Revenue Code and Regulations, court cases and IRS rulings and procedures.
Related: The Perfect Pair – Benefits of Having a CPA and a Financial Advisor
So let’s say that I did not scare you off. What should a self-employed person look for when they do their own return with tax software? Start by recognizing that as a self-employed person you are responsible for all of your own income tax by paying quarterly tax payments. If you underpay by much, you will owe a penalty. Second, recognize the “shock factor” of self-employment tax, which is the most unplanned for tax bill for self-employed folks. This tax is a 13.3 percent additional tax for Social Security and Medicare over and above federal and state income tax.
With these things in mind, what else should you be looking for?
As a self-employed person, you will usually be filling out at least two forms that most Americans do not complete: Schedule C for sole proprietors, and Schedule SE to pay self employment tax. If you have a home office you will be completing another form, but we professionals see many mistakes on this form, so watch out. If you want to try to determine depreciation, fill out Form 4562, but a word of warning here because bonus depreciation, Section 179, MACRS lives and AMT usually will send you screaming into the streets searching for tax help.
Related: Secrets from the Tax Back Room — Tips for the Self-Employed
The next thing we suggest is the tool that every decent tax professional in the country follows: Check every entry at least twice. After more than 30 years of tax practice, I still find that many tax return errors are caused by simply entering information incorrectly.
Related: 6 Tax Preparation Tips to Make Tax Season Easier
Bob Jennings
If you do decide it is too tough to prepare your own return, one last piece of advice: If you go to a tax expert and ask them to “look over” your return, they will usually charge more than if they did it for you. The IRS requires them to sign the return as a paid preparer, which means they need to review everything you have done, take full responsibility for the return, and incur professional liability.
Finally, what if you decide to go to a professional, what should you look for? Look for a CPA or IRS Enrolled Agent (EA), both of whom are required by law to pass difficult licensing exams, as well as meet pretty stringent continuing education rules every year. Ask your friends for a referral, check the web sites of firms in your area and ask some of the local businesses you deal with for referrals. Oh, and good luck!
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Category: Career, Money, Views on the News
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