Tax Issues for Self-Employed and Small BusinessPerson
The US it is a nation of entrepreneurs and there are a lot of self-employed individuals that enjoy pursuing their dream in business. Of course, few of you enjoy the paperwork and confusing tax issues that arise from owning your own business.
Many self-employed are considered “sole proprietors” or “independent contractors” for legal and tax purposes. this can be true no matter whether you’re turning a hobby into a business, selling an imperative widget or providing services to others. As a freelance, you report business revenue results on your income legal instrument. Following are some guidelines and issues you must detain mind if you’re pursuing your entrepreneurial spirit.
Schedule C – Form 1040.
As a worker, 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 a personal. this is often true whether you are doing 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 lead to a loss, the loss will generally be deductible against your total income from all sources, subject to special rules regarding whether your business is considered a hobby and whether you have got anything “at risk.”
Many self-employed individuals see of their home and are entitled to deduct a percentage of certain home costs that are applicable to the portion of the house that is used as your office. this could include payments for utilities, telephone services, etc. you will even be eligible to assert these deductions if you perform administrative tasks from your home or store inventory there.
If you’re employed out of your home and have an extra office at another location, you furthermore might could also be able to convert your commuting expenses between the 2 locations into deductible transportation expenses. Since most self-employed individuals find themselves working over the normal 40-hour week, there are a big number of advantageous deductions that may be claimed. Unfortunately, we discover that the majority self-employed individuals miss these deductions because they’re unaware of them.
Self-Employment Taxes – The Bad News
A negative aspect to being self-employed is that the self-employment tax. All salaried individuals are subject to automatic deductions from their paycheck including FICA, etc. therein many self-employed individuals often don’t run a proper payroll for themselves, the govt. must recapture these taxes through the self-employment tax. Simply put, you’re required to pay self-employment taxes at a rate of 15.3% on your net earnings up to $87,900 for 2004. For net in more than $87,900, you’ll pay further taxes at a rate of two.9% on the surplus.
In a remarkable twist that reveals the confusing nature of the tax code, you’re 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. as an example, if you pay $10,000 in self-employment taxes, you’re allowed a deduction on your 1040 return of $5,000. Many self-employed individuals miss this deduction and pay extra money to taxes than needed.
Health Insurance Deduction
This accustomed be a messy area for self-employed individuals, to wit, you received little tax relief when it came to your insurance bill. This was a specific burden for little business owners when considering the astronomical cost of insurance. All of this has changed, and you now may deduct 100% of your insurance costs as a disbursement.
Unlike a salaried employee sitting during a cubicle, you’re not subject to withholding on your paycheck. While this sounds great, you’re required to form quarterly income tax payments. If you fail to form the payments, you’re subject to a penalty, but the penalty isn’t the largest concern.
A potential and dangerous pitfall of being self-employed is failing to pay quarterly estimated taxes then getting caught at the tip of the year without sufficient funds to pay your taxes. The IRS isn’t visiting be happy if you fail to pay your taxes and you may suffer the results within the variety of penalties and interest. ensuring you pay quarterly estimated taxes helps avoid this case and it’s highly recommended that you simply follow this course of action.
You must maintain complete records of all business income and expenses. Simply put, document everything. Create a file system for every 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 just can detain your car and use whenever you travel. If you have got any doubt about documenting something, just do it!
As a self-employed individual, your focus and time is spent on making your business successful. Your focus isn’t on the complexities of the tax code and the way to limit the quantity of taxes you owe. If any of the data during this article is new you, then it’s highly likely you’ve got paid way more in taxes than required.