Who is Self-Employed?
Generally, you are self-employed if any of the following apply to you.
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business)
Everyone in business must keep records. Keeping good records is very important to your business. Good records will help you do the following:
- Monitor the progress of your business
- Prepare your financial statements
- Identify sources of your income
- Keep track of your deductible expenses
- Keep track of your basis in property
- Prepare your tax returns
- Support items reported on your tax returns
Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.
Prepare your financial statements
You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
- An income statement shows the income and expenses of the business for a given period of time.
- A balance sheet shows the assets, liabilities, and your equity in the business on a given date.
Identify sources of your income
You will receive money or property from many sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.
Keep track of your deductible expenses
Unless you record them when they occur, you may forget expenses when you prepare your tax return.
Keep track of your basis in property
Your basis is the amount of your investment in property for tax purposes. You will use the basis to figure the gain or loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses.
Prepare your tax return
You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.
Support items reported on your tax returns
You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.
If you owe the IRS, or receive a letter from the IRS, come see us!
The Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic can consult with you to provide advice regarding your IRS tax problem, and/or potentially act on your behalf for FREE if you qualify for assistance (come to a clinic intake session)!
Jim Floyd is the Staff Enrolled Agent at the Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic. As an Enrolled Agent, Jim is a federally-licensed tax practitioner with unlimited rights to represent clients before the Internal Revenue Service. This means he is unrestricted as to which taxpayers he can represent, what types of tax matters he can handle, and which IRS offices he can represent clients before. Enrolled agent status is the highest credential the IRS awards.
Jim is also an Accredited Small Business Consultant™ (ASBC). By receiving the ASBC designation, Jim demonstrated the knowledge required in all core competencies of small business and SME consulting to effectively assist clients in improving operations and achieving higher profits.
Jim is a member of The American Society of Tax Problem Solvers (ASTPS), a non-profit professional association of practitioners that specialize in representing taxpayers before the IRS and other taxing authorities. Membership in ASTPS reflects commitment to excellence and high standards in taxpayer representation.
Source: Internal Revenue Service