There are a few things self-employed individuals should know about taxation, especially as there are some unique exemptions for homesteaders. Whether you make enough to break even on your homestead or you only get a little side income, it is important for you to know the ins and outs of taxation, especially as self-employed individuals need to pay a self-employment tax. In addition, you will need to keep track of business and personal expenses. Read on to learn some more self-employment tax tips for homesteaders
Everyone has to pay taxes through the year, but most salaried and hourly employees have their taxes withheld from their paycheck. Self-employed citizens, however, have to estimate their taxes for the whole year and pay in four equal portions according to this estimate. In addition, they will have to pay a self-employment tax that goes into social security and Medicare. Usually, your employer would pay a portion, but if you are self-employed you need to cover the whole thing.
Fortunately, according to the IRS, you can actually deduct this employer portion from your adjusted gross income. You can also get a deduction to cover health insurance, as that is often offered through employment. Use form 1040 or 1040-SR Schedule C for claiming these deductions. You will have to pay self-employment tax if either of these criteria apply:
· Your net earnings from self-employment (excluding church employee income) were $400 or more.
· You had church employee income of $108.28 or more.
Now, you may be wondering how you are expected to predict your taxes when you might not know exactly what your income will be. This is a complicated question, but when in doubt, remember its better to overpay than underpay; the difference will be sent to you via refund. In addition, while you do need to pay self-employment tax if you earn more than $400 in a tax year, you will only have to pay quarterly if you will owe over $1000 come tax season and if your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% of your liability last year, whichever is smaller.
In addition, you don’t have to pay estimated taxes if you weren’t tax liable in the fall of the previous year. While there are specific tax deadlines for estimated taxes, you can pay early, or even month by month to avoid the hassle. If your earnings fluctuate, it may be easier to estimate your expenses quarter by quarter based on your earnings. To do this, you send in the regular Form 1040-ES and readjust your projection, then add IRS Form 2210 to your annual return to explain why you didn’t send equal payments. If you are doing your own taxes, make sure to look up IRS Publication 505, which explains many of the rules and restrictions for these payments. High quality tax software can also help, and if you are still nervous about doing the work on your own, you should consider hiring a tax planning professional.
Property taxes can be the worst part of owning your own lawn for homesteading purposes, but fortunately there are exemptions you may be able to access that take the sting out of your taxes. These tax exemptions can vary from state to state, but they should apply if your homestead is your primary residence. Keep in mind that in some states, these exemptions are only available to certain protected classes, such as senior citizens, disabled people, and veterans. Be sure to look up your own state’s rules.
Unlike other tax exemptions or deductions, you usually have to apply for a homesteading exemption in advance. This is because a homesteading deduction works by lowering the taxable portion of your property value, usually by a set percentage. As different states have different requirements, such as length of time in the state and value of the property, you will want to look up your own state and apply for the exemption through the local tax offices.
If you have paid estimated taxes through the year, you will still need to pay the rest of your tax bill come April. If you have gone over your tax requirements, you will get the money back as a refund now. Make sure that you keep track of your tax documents, such as quarterly payments, as well as expenses and any interest paid back on your loans. Some other documents you should make sure you have prepared include: auto expenses (mileage or actual expenses), bank fees, computer and internet, insurance, labor, legal or professional fees (lawyer or accountant), licenses and permits, property tax, savings, supplies, telephone bills, and utilities.
By making sure you have all the proper documents, deductions, and expenses prepared, you will be more able to finish your taxes efficiently and avoid the dreaded audit. Make sure you keep track of everything throughout the year, and keep copies of all documents you may need to prove your claims. Be honest and accurate: this is the easiest way to complete your taxes on time.
We all make mistakes, and it can be enormously stressful to get a call from the IRS. If you do make a mistake on your taxes, don’t worry; unless you were actively fudging the numbers, you are unlikely to experience overwhelming penalties. As a general rule, if you didn’t file quarterly taxes when you were supposed to or you didn’t pay enough, you may experience a penalty. However, you may be able to get a break from these penalties if you suffered a disaster, accident, or unusual circumstance. In addition, if you are over 62, recently became disabled, or retired, you may also be able to argue your mistake was caused by “reasonable cause” rather than “willful neglect.”
If you do happen to be audited, contact a tax professional right away. They will be able to guide you through the process and help you handle it with as little penalty as possible. Everyone makes mistakes, and the IRS doesn’t want to needlessly punish you (even if it may feel like it does sometimes.)
Many self-employed individuals such as homesteaders and farmers need a little help come tax season, so reach out to a local tax professional or CPA if you can. They will be able to talk to you about your individual needs and create a customized tax plan. In addition, make sure you keep your business and personal expenses separate, including having a separate bank account. Make sure you also pay yourself from your business earnings Even if it just seems you are moving money from one account to another, this will help you save more come tax season. Contact a local tax office if you have any questions.