Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

Small Business Tax Issues for Self-Employed Individuals

VIEWS: 8 PAGES: 3

									Title:
Small Business Tax Issues for Self-Employed Individuals

Word Count:
869

Summary:
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.


Keywords:
tax, self employed,


Article Body:
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.

								
To top