new office (Photo credit: jeremyclarke)

Working for yourself, deciding your own schedule, not having to answer to anyone, and running your business in your PJs from the comfort of your living room -- it all sounds really attractive doesn't it? This epitomizes flexibility, choice and the opportunity to focus on what is important to you, while making a profit. Nonetheless, there are issues that arise when you go it alone -- understanding best business practices, budgeting and, of course, taxes. For tax purposes, anyone who works as a freelance contractor or consultant is regarded as self employed, assuming the annual income from their work exceeds $600.00. Learning about the way taxes work and what tax breaks you can claim is crucial to your survival.

An Overview of Taxation Methods

If you work for yourself, you pay tax in a different way to if you were employed by somebody else.  Rather than receiving a salary, which the IRS is notified about, you submit a yearly tax return that includes a Schedule C form. This reports the running costs of your business and your gross receipts. After this, your net profits are taxed. For compensation purposes, you might receive a 1099-MISC form. If the net amount you earn on a freelance basis exceeds $400.00, you will need to pay FICA (self employment tax). On Form 1040, you can subtract fifty percent of FICA from your gross revenue.

Monitoring Your Expenses and Income

Lots of self employed people struggle to submit their tax forms, because they have failed to record how much cash they have earned and spent during the year. This is a shoddy way to run a company! If you are audited, you will be required to prove that the expenses and income you claim on your tax return are accurate. Therefore, always store that information for a minimum of three years, or perhaps even longer in some cases. Decide how you will monitor these details during the year -- numerous web based "cloud" accountancy platforms have appeared in recent times. Many are straightforward and logical, and others are highly secure (featuring payroll and inventory monitoring).