There are many great things about being self-employed, but taxes are not usually one of those things. Self employment taxes can easily become convoluted, and most tax experts agree that the self-employed are more likely to be audited. Luckily, there are specific things you can do to avoid triggering an audit. Here are three of them:
Be Conservative When Claiming Business Expenses
An unusually large number of business expenses for your income bracket can easily raise the eyebrows of an IRS agent. Don’t be afraid to claim deductions for legitimate business expenses, like a new computer you use for work, or annual fees for a professional organization, but be sure to keep all receipts organized and clearly labeled.
Claiming a large portion of your home as a home office when really you work in a corner of the living room, or claiming a vacation or tons of meals out as business-related when they were actually personal can quickly get you into trouble.
Avoid Income Discrepancies
Remember that the IRS receives copies of any 1099 forms from your clients. When filing your taxes, your income should match the official documentation. If you notice an error or discrepancy the best thing to do is contact your client and have them issue a corrected form before you file your taxes.
Stay On Top of Quarterly Taxes
Newly self-employed individuals sometimes forget that in addition to their annual income tax they also need to pay quarterly self-employment taxes using form 1040-ES. If you’ve already missed some quarterly tax payments this year, be sure to get caught up (ideally with the help of an accountant) to minimize the penalties.
By following these tips, you will reduce your chances of an audit, but keep in mind it’s impossible to completely eliminate the risk since many audits are random. If you receive an audit letter in the mail, don’t panic- an audit is simply a process and as long as you have documentation of all your income and business expenses it will be reasonably painless.
To get through a tax audit or simply have help navigating the tricky world of self-employment tax, feel free to contact us anytime.
