When you work from home there are several things you need to know about the law in order to keep from getting into trouble in the future. You need to be able to manage your finances appropriately, pay any taxes required, and make sure that you are following all IRS and local laws.
The first thing to understand is the definition of self-employment. Even though you are selling products for a company or doing work for them, you may not be an employee. If you are paid without taxes being withheld, you are likely an independent contractor. In most cases, you will be told this and made to sign an independent contractor agreement. The independent contractor agreement will come from the other party. If you are not made aware of this fact, remember that you can easily tell if you are a contractor or an employee by how you are paid and whether or not you receive benefits. The IRS has a great worksheet available on their website that will help you determine if you are self-employed by their standards. You will be considered a 1099 candidate.
The other thing you need to understand is that you have to pay income taxes on your income even if you don’t own an actual business or you do not have taxes withheld from your pay. This is considered self-employment tax. Typically it is paid quarterly, depending on the amount of your income. Payments throughout the year will save you from having to pay the entire tax amount at the end of the year. The self-employment tax is in addition to individual income taxes. You may want to consider a corporate entity. There are several to chose from such as a LLC, S Corp or C corp. Good Legal or Accounting counsel can help you with which is best for you and your business.
Managing your finances will play a huge role in the accuracy of your annual tax preparation. Keeping your business and personal finances separate is essential. You should keep a log of all your expenses and have separate accounts for personal and business expenses. Good record keeping is essential; and will make it much easier to compute income and expenses related to your self-employment.
There are many deductions you could miss out on if you do not keep accurate and separate financial records. The IRS has a publication that can help you track your deductible expenses more easily. www.irs.gov.
Finally, you need to realize that there are other legal entities to please besides the IRS. If your business is not solely operated on the internet you will likely need to obtain a business license for your state, county or city. You may also be required to charge sales tax on your services or products based on your location. It is best to obtain all of this information from your local small business administration before starting your business to avoid future legal complications.
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