As a self-employed professional, there’s a good chance that tax season is your least favorite time of the year. Not only is it a hassle to collect all your financial records and fill out the necessary forms, but self-employed individuals are also stuck with calculating and paying taxes that would otherwise be paid by a distinct employer.
The one bright spot is the possibility that you may qualify for a refund. As a small business owner, understanding how tax refunds are calculated is a crucial part of protecting your company’s financial assets and ensuring you get back everything you deserve from the IRS.
Small Business Tax Calculations
Because the federal government does not automatically withhold part of your paycheck to pay taxes when you’re self-employed, you will need to make your own estimated tax payments throughout the year if you expect to owe more than $1,000 in taxes for the given tax year. This is known as a “pay-as-you-go” system of taxation, with payments due four times a year.
Estimated payments help you avoid IRS penalties and prevent you from being hit with a large bill at the end of the fiscal year. A tax-refund calculator can help you determine if you’ve underpaid your taxes or if you’ve paid too much and, as a result, may qualify for a refund. Knowing what your refund will be enables you to make better decisions about financial planning moving forward.
It’s no secret that deducting expenses helps lower your taxable income. Itemizing deductions is especially important for small business owners who must pay the employer-equivalent portions of their self-employment taxes (SE taxes). Fortunately, the majority of small business owners qualify for a number of deductions.
As a self-employed person, you will need to fill out Schedule C Form 1040 (or C-EZ) before the April 15 deadline. Schedule C details all the expenses a self-employed person can deduct. By subtracting your expenses from gross annual income, or total wages and revenue, you can calculate the net profit or net loss for a given tax period.
Here are some notable deductions that can affect the potential tax refund you might receive:
- IRA or Retirement Plan: A small business can defer taxes on IRA contributions and other funds set aside for retirement. For the 2016 tax year, the IRS permits self-employed persons to contribute $18,000 as a 401(k) deferral, plus 25% of their net income. Additionally, small businesses can set up retirement savings options for their employees with simplified employee pension plans (SEPs). Available to businesses of all sizes, SEPs allow employers to deduct contributions made to employee retirement accounts.
- Home Office: As the owner of a small business, you can deduct the part of your home used for business purposes as well as a portion of your mortgage interest, real estate taxes, electricity and internet usage. Be aware, however, that you can only claim a deduction based on the exclusive business use of your home. So if you’re thinking of deducting the value of the “bedroom office” that you sleep in at night and work from during the day, you won’t be able to take this deduction.
- Self-Employment Tax: Although self-employed individuals must pay SE taxes, the IRS allows you to deduct half of this contribution for tax purposes. Read the IRS’ Self-Employment Tax page for details.
- Charitable Donations: Many tax filers forget to deduct the value of qualified charitable contributions, including donations to churches and nonprofits. In some cases, property donations like cars and furniture are also tax-deductible.
- Medical Expenses: The IRS permits the deduction of medical expenses totaling 10% or more of your gross income. Prescription drugs, surgery bills and therapy visits are all potentially tax-deductible. So is insurance.
Once you’ve calculated the value of all possible deductions, add up the total. If your itemized tax deductions exceed the value of the standard deduction for your filing status, use this number for tax calculations.
If you find that dealing with specific amounts or varying paperwork is taking too much of your time, utilities like QuickBooks Self-Employed can be used to prepare your estimated taxes and organize your Schedule C with ease.
Receive Your Refund Faster
It’s no secret that businesses rely on their tax refunds as much as individual filers. If you’re looking for a more efficient way to receive your tax refund this year, consider signing up to have your refund sent to your checking or savings account via direct deposit. If your refund doesn’t show up on schedule, you can visit the IRS’ Where’s My Refund? page to find out if your return requires additional review. Fortunately, the IRS issues most refunds within 21 days of receiving your tax forms, so your hard-earned money can be yours again in less than a month.
For a more in-depth article on the entire tax-filing process, check out our complete guide to taxes for the self-employed.