The United States is a nation of entrepreneurs. There are literally tens of millions of self-employed individuals that enjoy pursuing their dream business. Of course, few of you enjoy the paperwork and confusing tax issues that arise from owning your own business.
Many self-employed individuals are considered "sole proprietors" or "independent contractors" for legal and tax purposes. This is true regardless of whether you are turning a hobby into a business, selling an indispensable widget or providing services to others. As a self-employed person, you report business revenue results on your personal income tax return. Following are a few guidelines and issues you should keep in mind if you are pursuing your entrepreneurial spirit.
Schedule C - Form 1040.
As a self-employed person, you are required to report your business profits or losses on Schedule C of Form 1040. The income earned through your business is taxable to you as an individual. This is true even if you do not withdraw any money from the business. While you are required to report your gross revenues, you are also allowed to deduct business expenses incurred in generating that revenue. If your business efforts result in a loss, the loss will generally be deductible against your total income from all sources, subject to special rules relating to whether your business is considered a hobby and whether you have anything "at risk."
Home-Based Business
Many self-employed individuals work out of their home and are entitled to deduct a percentage of certain home costs that are applicable to the portion of the home that is used as your office. This can include payments for utilities, telephone services, etc. You may also be eligible to claim these deductions if you perform administrative tasks from your home or store inventory there. If you work out of your home and have an additional office at another location, you also may be able to convert your commuting expenses between the two locations into deductible transportation expenses. Since most self-employed individuals find themselves working more than the traditional 40-hour week, there are a significant number of advantageous deductions that can be claimed. Unfortunately, we find that most self-employed individuals miss these deductions because they are unaware of them.
Self-Employment Taxes - The Bad News
A negative aspect to being self-employed is the self-employment tax. All salaried individuals are subject to automatic deductions from their paycheck including FICA, etc. In that many self-employed individuals often do not run a formal payroll for themselves, the government must recapture these taxes through the self-employment tax. Simply put, you are required to pay self-employment taxes at a rate of 15.3% on your net earnings up to $87,900 for 2004. For net income in excess of $87,900, you will pay further taxes at a rate of 2.9% on the excess.
In an interesting twist that reveals the confusing nature of the tax code, you are allowed a partial deduction for the self-employment tax. Simply put, you are allowed to deduct one-half of your self-employment taxes from your gross income. For example, if you pay $10,000 in self-employment taxes, you are allowed a deduction on your 1040 return of $5,000. Many self-employed individuals miss this deduction and pay more money to taxes than needed.
Health Insurance Deduction
This used to be a very messy area for self-employed individuals, to wit, you received little tax relief when it came to your health insurance bill. This was a particular burden for small business owners when considering the astronomical cost of health insurance. All of this has changed and you now may deduct 100% of your health insurance costs as a business expense.
No Withholding Tax
Unlike a salaried employee sitting in a cubicle, you are not subject to withholding tax on your paycheck. While this sounds great, you are required to make quarterly estimated tax payments. If you fail to make the payments, you are subject to a penalty, but the penalty is not the biggest concern.
A potential and dangerous pitfall of being self-employed is failing to pay quarterly estimated taxes and then getting caught at the end of the year without sufficient funds to pay your taxes. The IRS is not going to be happy if you fail to pay your taxes and you will suffer the consequences in the form of penalties and interest. Making sure you pay quarterly estimated taxes helps avoid this situation and it is highly recommended that you follow this course of action.
Record Keeping
You must maintain complete records of all business income and expenses. Simply put, document everything. Create a filing system for each month and file every receipt, etc. All business travel expenses must be documented, including auto mileage you incur when performing business tasks. Office supply stores sell business mileage books that you can keep in your car and use whenever you travel. If you have any doubt about documenting something, just do it!
In Closing
As a self-employed individual, your focus and time is spent on making your business successful. Your focus is not on the complexities of the tax code and how to limit the amount of taxes you owe. If any of the information in this article is new to you, then it is highly likely you have paid far more in taxes than required.
Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review.
Astrophysics and Other Universe Sentient Life Earth is about 6 Billion years younger than other parts of the 'known' universe. There are other universes. Water and life on Mars is now a fact and there is wa...
8 Ways to Get Your Healthy Groove On If we are lucky we will see more than 27,000 days. We spend a good portion of these days caring for, considering and supporting our physical body… getting enoug...
Peru-Lima, Miraflores Vacation Rentals Deals Visiting Peru is a magical adventure because of Cusco and Machu Picchu. However, so many visitors miss the experience of being in Miraflores-Lima. If you want t...
Stress Reducing Exercise Ideas for Moms Take time to take care of you. There is always a form of exercise that will keep you healthy and smiling - exactly what all moms need.
Internet And Network Marketing There are unique promotinal tools availble on Internet and writing articles is one of them.
Innovation Management: What Problem Is Being Solved? Franklin (2003) reported that many innovations fail due to a lack of focus. This sentiment is echoed by Doug Richards (Words of wisdom from the dragon's mouth, ...
What Not to Tell Your Doctor? Various pieces of medical history can come back to prevent a patient from getting insurance, mortgages, security clearance and jobs. A real dilemma but it can m...
Pursuing Your Destiny In my young mind, I look forward to Easter Sunday because life returns to normal... but what is Easter all about? Does it have a tangible effect in our career?
Negative Calorie Foods & Weight Loss You gain weight when your calorie intake is more than your
calorie expenditure. But if this calorie equation is reversed,
then it results in "negative calorie...
The Silver Club Casino The Silver Club Casino is located right off of Interstate 80 and situated in the middle of downtown Sparks. You can park your car and be in the Casino within 3...
Real Estate Investing Works In Your Area Too! Last Friday I was on the phone with a perspective client of ours. Let's call him "Jeff". Now, I have to be honest with you here, what Jeff had to say during our...
Diabetes the Silent Killer – The Iceberg Effect! What sank the "Unsinkable Ship" the Titanic was not the tip of the iceberg, but the lurking 90 other percent of the iceberg hidden under the surface.Diabetes is...
Postcard Marketing For Tourism Industry Use postcard to market your services in the local community.Marketing Postcard is cheap cost and high effect, contribute to the brand building and create a good...
Small Business Essentials: Start Here Thinking of starting a business on line? If you are a novice to business, take the time to educate yourself. Remember, word of mouth advertising is essential t...
Print this page