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Tax Tips for Self-Employed Individuals

If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed, and you will need to include on your tax return your income and allowable business expenses to determine your net profit. Your net profit is subject to both income tax and self-employment tax.  

Here are some things you should know about self-employment:

   •     If you provide services as an independent contractor, each business that engages you will ask you to complete and provide them with a copy of IRS Form W-9.  This is the way you provide and certify your contact information and Social Security number to the business that hired you.  The hiring company will issue you an IRS Form 1099-MISC and provide a copy to the IRS for the amounts paid to you during the year. 

·         If you are self-employed and have a net profit of $400 or more, you have to pay self-employment (SE) tax.  SE tax is a social security and Medicare tax primarily for individuals who work for themselves.  It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.  However, since you have no employer, you are required to pay both the employer’s and the employee’s share of the social security and Medicare taxes, thus making the SE tax double what an employee would pay.  However, you are allowed to deduct half of your self-employment tax in figuring your adjusted gross income.

·         Since you do not have an employer to withhold taxes from your pay, you generally will be required to make estimated tax payments to cover your income and SE tax liabilities from your self-employment.  Estimated tax is the method used to pay tax on income that is not subject to withholding.  If you end up owing taxes when you file your tax return after the end of the tax year, you may be penalized for underpayment.  If your taxes from self-employment are small and you have other income from employment on which tax is withheld, it may be possible to adjust the withholding to cover the taxes from the self-employment.

·         You can deduct the costs of operating your business including expenses, cost of goods sold, and depreciation on capital assets used in business.  Temporary liberal expensing and depreciation rules mean that most small business owners can fully deduct the purchase costs of nearly all capital assets placed in service during 2010 and 2011.  However, careful tax planning is needed to maximize the benefits of the write-offs.

·         To be deductible, a business expense must be both ordinary and necessary.  An ordinary expense is one that is common and accepted in your field of business.  A necessary expense is one that is helpful and appropriate for your business.  An expense does not have to be indispensable to be considered necessary.

·         If you also resale products, you probably will be required to obtain a resale permit from your state, and collect and remit sales tax to the state on a periodic basis.

·         Depending upon the location of your business, you may also be required to obtain a business tax permit, which is really a way for the local government entity to collect tax on your sales.  In addition, if you have fixed assets that you use in your business, the local government entity will probably assess a personal property tax based on the value of the assets. 

Setting up a self-employment business can be complicated and you are urged to contact this office for assistance.

Stop wasting time marketing on social media like EVERYONE else. - Marketing & Sales

Stop wasting time marketing on social media like EVERYONE else. - Marketing & Sales

TAX EDUCATION

Whether you prepare your own taxes or pay a tax professional, you are ultimately responsible for the information in your tax return. Make sure you understand this information before you sign the tax return. I have talked with many taxpayers (YOU) who were unaware of the information in their return. If your tax preparer is not taking the time to explain to you what is or “isn’t” in your return they are not serving your best interest. GET EDUCATED, ask questions. I would strongly recommend that you keep your tax advisor’s phone number on speed dial. Effective tax reduction requirers planing and review through out the year. Tax filing season January through April 15 is “report card” time. This is when you get to see how effective you tax planning was, this is not the time to try to lower your tax liability.

The IRS website (www.irs.gov) has many links to various tax topics which will assist you in paying the least amount of tax that you are legally obligated to pay. One of my personal favorites is the IRS Daily Tax Tip. You can subscribe to this newsletter and each day you will receive a bit of useful tax information that may help to lower your taxes. You can then discuss this information with your tax advisor (by the way his fees are deductible). They are short (3 – 4 paragraghs) and easy to read. Below is a recent posting:

Six Facts about IRS Publication 17
Starting with “What’s New for 2010” IRS Publication 17, Your Federal Income Tax, takes you step by step through each part of your individual Federal Income tax return. This comprehensive booklet explains the tax law in a way that will help you better understand your taxes so that you pay only as much as you owe and no more.
Here are the top six things the IRS wants you to know about Publication 17.
1. Publication 17, Your Federal Income Tax, is available on the IRS website at http://www.irs.gov and contains a wealth of information for individual taxpayers.
2. The online version of Publication 17 contains electronic links that make finding your answer simple. Both the downloadable PDF and online 2010 Publication 17 have thousands of helpful hyperlinks.
3. Publication 17 is packed with basic tax-filing information and tips on what income to report and how to report it.
4. Publication 17 also includes information on figuring capital gains and losses, claiming dependents, choosing the standard deduction versus itemizing deductions, and how to claim valuable tax credits.
5. Publication 17(SP) El Impuestos Federal sobre los Ingresos is available in Spanish.
6. You can get a hard copy of Publication 17 for free. To get a copy, visit http://www.irs.gov or call 800-TAX-FORM (800-829-3676).

Links:
• Publication 17, Your Federal Income Tax
• Publication 17, Your Federal Income Tax (PDF 2085K)