Anyone who works for themselves is considered self-employed by the IRS and required to file a Schedule C tax return on all income they receive. That includes everyone from someone already receiving social security who is paid in cash for mowing neighborhood lawns to the person who takes in money through sales, the carpet layer contracting with local stores for installation work and any others who bring in income. Some people even need to file more than one Schedule C.
The secret to making a business work for you lies in keeping receipts for every penny spent so that you can offset that income, and filing properly. Most independent contractors don't have the time to do regular monthly bookkeeping so they're stuck trying to organize everything when they tackle that disorganized pile of receipts at the end of the year. And if you know the IRS rules for your industry that can be enough, but you need to know what is considered normal for your industry.
Although it's easy to find someone to prepare a Schedule C small business tax return for you, unless you know exactly what the IRS expects of a self-employed person that tax return will not be accurate and you'll never get every tax deduction allowed.
Surviving a tax audit is very easy with organized records. Independent contractors will want to start by following these four simple rules:
- Never mix business income with personal income and expenses. The IRS can disallow otherwise worthy deductions if you mix them with personal business so always deposit all business income into a separate bank account.
- Keep a detailed diary of all business miles, especially if you use a vehicle also for personal miles. This is required in order to take the mileage deduction which is often a big one for independent contractors.
- When deducting meals you must write the names of everyone at that meal, as well as the business discussed, on the receipt. Don't forget the tip.
- Those who make or buy items for resale are required to track their inventory for IRS purposes.
You also need to learn what you can and cannot deduct, how to track tips, document income, handle inventory, produce audit-proof records and create a simple report with all of the numbers necessary for a Schedule C small business tax return. This all needs to be done before you visit the tax pro, or you can use it to complete your own tax form.