Red Flags the IRS Looks for When You Are Self-Employed

taxes for the self-employed

Being self-employed comes with a lot of benefits but a number of pitfalls, as well. For example, I love being able to make my own schedule, being able to make as much money as I want and not worrying about a boss or about going to an office every day. I love that if I feel like putting down my work for a while so I can take my kids on a golf cart ride that it’s my choice. However, I dislike paying my own taxes every year. I also dislike the fact that I work harder as a self-employed person than I ever did when I worked for someone else; and I really dislike tax time as a self-employed person. There are a number of red flags that the IRS looks for when we filed our Schedule C, and many of those red flags can result in an audit. Here’s what the IRS might look for if you are self-employed and filing your taxes.

Making Too Little Money

Being a business owner means you might not make the same amount every year, but the IRS doesn’t like it when you make too little. If you are deducting expenses left and right and making it look as if your bottom line is far too low, you might see an audit. Rest assured though, that losses do happen. The IRS just wants to keep your business losses to a minimum – 2 out of every 5 years. You better make a profit the other 3 years or they’ll come looking.

Making Too Much Money

Let’s face it; you can’t win when you make money. You can make all you want being self-employed, but the IRS might find it suspicious if you make too much. Anyone with their own business and more than $200,000 in income is more than 20% more likely to suffer from an audit than those who make less than $25,000 per year with their own business.

Home Office Deductions

I work solely from home, and I have a dedicated office off my master bedroom suite. I love it, but it’s a hassle to deduct it on my income taxes every year. It also makes the IRS look twice at me. The reason? Because you can write off a lot of stuff if you work solely from home in a home office, and people claim that they do when they really don’t.

Major Travel Deductions

It’s true that you can deduct your travel and meals and other expenses when you are self-employed, but that is just a red flag for the IRS. Some officials believe that high expenses for these types of write-offs might be a little bit suspicious, especially since so many people also travel for pleasure and try to write that off as a business expense.

100% Use of a Personal Vehicle for Business

You can depreciate your car and take a deduction from that, but we know your car was not used 100% for business purposes only. We know that it was used for your personal enjoyment. We know you took the kids to school and you ran to the store; it’s a slippery slope to claim it as 100% business use. You can’t prove it, and the IRS looks at that when they perform audits.

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