Note: This is the second in a six part series about business essentials that beauty and bodywork professionals who are independent contractors or who run a business need to know. The series, “Going It Alone,” runs every two weeks. The last installment was posted Feb. 26 and dealt with motivation.
The day is fast approaching, and it’s one that you need to prepare for. No, it’s not the end of the world—though sometimes it might feel like that. It’s April 15, that dreaded day when taxes are due.
While very few, if any, people look forward to Tax Day (let’s face it, even if you’re getting a refund, filing taxes is not fun), there is a way for you to make your life easier when it comes to filing your taxes. If you keep good records, filling out a 1040A or knowing what to do with that 1099-Misc. form can be a lot easier.
This second part of our “Going It Alone” series deals with taxes and record keeping. The post is designed to give a very brief and general outline about taxes and should not be relied on solely for your individual tax circumstances. Talk to a tax advisor about your unique situation.
Understanding Independent Contractor Tax Rules
If you are a massage therapist or a cosmetologist that works in a salon but you’re not considered an employee, you are an independent contractor. The Internal Revenue Service (IRS) notes, “If you are an independent contractor, you are self-employed.” There are many different rules that you need to know, but one of the most important is that if you make more than $400 per year, you need to pay quarterly taxes in April, June, September, and January in addition to filling out your regular yearly tax forms. Only doing your taxes once a year means that you will have to pay penalties for not paying on time.
The IRS offers a “Self-Employed Tax Center” that goes into more details about how to pay quarterly taxes and other important information you should know.
Annual Taxes and Deductions
Filing your yearly taxes by April 15 each year is extremely important. Unfortunately, because tax situations are so different from one person to another, it is impossible for us to go into detail about situations and circumstances similar to your own individual tax situations. However, there is one thing that can be similar for almost everyone.
Deductions are a way for you to lower your tax bill. For example, if you are a massage therapist and you buy massage equipment for your business, you can deduct that from your tax bill. There are many different deductions you can get (you should talk to a tax advisor to learn more), but some of them include:
- Supplies for your business
- Magazine subscriptions (if related to or used for your business)
- Association fees
- Business travel
- License fees
There are also many different helps for you when it comes to taxes. The IRS website has a lot of useful information and there are a number of companies that offer to help you file your taxes, including H&R Block and Jackson Hewitt. If you would like to do taxes on your own, TurboTax and TaxAct could be for you. (Please note that references to these companies or tax software is for example purposes only and does not indicate endorsement.)
Record Keeping Is Essential
Filing taxes can be stressful enough even when you have all the information you need. Imagine, then, how awful it will feel if you can’t find the forms, receipts, invoices, and records you need. Don’t let this happen to you.
There are many different ways that you can organize your records, but no matter what you do, there are a few things that you need to keep in mind:
- Don’t throw anything away that has to do with your business. This is extremely important for a few reasons: A) It will make filing your taxes a whole lot easier B) If you’re audited, you have the records you need, and C) The IRS has the ability to audit you for 10 years (with some exceptions that go even longer) after the year you filed. This means that your 2014 tax filing might be audited anytime between now and 2024! If you thrown records away before then, you won’t have the proof you need if you are audited in 2022.
- Know where your organized records are. Meticulously organizing your records won’t do you any good if you forget where you put them. Likewise, if you have all of your records in one place but you simply throw everything in the drawer, that also won’t help. If you need a simple way to organize records, go to the store and buy some manila folders. You can then use these folders to keep important records that go together, such as invoices and receipts, together so they don’t get lost in a mess of papers. You can then mark these folders for easy reference (such as Taxes 2014 or 2014 Receipts).
- It can also be a good idea to have copies of your important information. One of the easiest ways to do this is to simply scan documents and then organize them in folders on your computer. Losing track of computer files is even easier than losing hard-copy files, so make sure you know exactly where the files are stored on your computer.
- When you do throw records away, make sure you shred them. If you just get a large trash bag and throw away sensitive documents—such as forms with your social security number, birthday, or address on them—and if someone finds them, they can be used to steal your identity. This is even more important if you are throwing away documents with your customers’ information on them because you could be held liable if your customers’ identity gets stolen.
Keeping good records is an important part of being self-employed, and can help you not just at tax time, but for many other different situations as well.
We hope that this blog post helps you as April 15 approaches. Please keep an eye out for future blog posts in the “Going It Alone” series.
Beauty and Bodywork Insurance offers massage therapy insurance for only $96 a year and the application can be filled out online in ten minutes or less.