Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/a26f9f83/public_html/articles/includes/config.php on line 159
Small Business Tax Issues for Self-Employed Individuals > NetSparsh - Viral Content you Love & Share

Small Business Tax Issues for Self-Employed Individuals

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.

In The News:

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news

New York Times

Republicans, Closing In on Final Tax Bill, Aim for a Vote Next Week
New York Times
WASHINGTON — Republican lawmakers, scrambling to reach agreement on a final tax bill that they hope to pass next week, are coalescing around a plan that would slightly raise the proposed corporate tax rate, lower the top rate on the richest Americans ...
Tax package would lower top tax rate for wealthy AmericansThe Denver Post
Republicans propose to delay, pause Obamacare taxesReuters
GOP negotiators move closer to reducing top tax rate for high-income households but face blowbackWashington Post
Politico -ConsumerReports.org -Treasury Department
all 799 news articles »

New York Times

How the Tax Bill Hurts the Poorest Schools
New York Times
Currently, taxpayers can deduct their state and local taxes, and that deduction makes them more likely to support higher spending on programs funded by those taxes, including public schools. With its bills, Congress would significantly cut the ...

and more »

CNN

Trump winds up for final pitch to Americans on tax overhaul
CNN
Joined by about 120 people -- families and military personnel who have been invited -- the President will speak Wednesday afternoon from the Grand Foyer of the White House. Some young people will be among those invited, and the President will dedicate ...

and more »

Bloomberg

Facebook to Start Paying Taxes Locally, Instead of Through Ireland
Bloomberg
The Commission also has ordered Apple Inc. to pay about 13 billion euros (about $15 billion) in back taxes to Ireland, after it said the country granted unfair deals that reduced the tech giant's corporate tax bill. Apple and Ireland are appealing the ...
Facebook to overhaul Irish tax schemeBBC News
Facebook to stop routing ad revenue via Ireland amid pressure over taxesThe Guardian
Facebook to Give Countries a Chance to Tax Its Profits From Local AdsWall Street Journal
Irish Times
all 45 news articles »

New York Times

California Today: A Tax Challenge for Sacramento - The New York ...
New York Times
Tuesday: Proposition 13, Mayor Ed Lee of San Francisco dies, Mulholland Drive and a box of chocolates.
As California burns, Congress plans to slash tax write-offs for fires and other disastersLos Angeles Times

all 16 news articles »

6 States Raising Taxes in 2018
Motley Fool
Let's face it, no one enjoys preparing their taxes or complying with federal and state tax code each and every year. It's not hard to see why, either. The federal tax code was nearing 10.1 million words in length as of 2015, and it's gained an average ...

and more »

Business Insider

Paying taxes on bitcoin isn't nearly as hard as it sounds
Business Insider
Bitcoin's incredible rise in value from just shy of $1,000 per bitcoin on January 1 to more than $19,000 on December 8 has likely caused many bitcoin owners to sell all or part of their investment. But as tax season approaches, it may not be ...

and more »

New York Times

Tax Plan's Biggest Cuts Could Be in Living Standards
New York Times
In the summer of 2006, as President George W. Bush was pressing to make permanent the tax cuts he had pushed through Congress in 2001 and 2003, the Treasury Department published a so-called dynamic analysis that, the administration hoped, would prove ...

and more »

Protection sought to ensure gross receipts taxes from LANL
Santa Fe New Mexican
Santa Fe County commissioners want the state Legislature to protect Northern New Mexico communities from the possibility that a change in management at Los Alamos National Laboratory could cost local governments millions in tax revenue. Commissioners ...

and more »

Realty Income: Oh No Not Higher Taxes
Seeking Alpha
But if you are holding the stock in a taxable account, there could be some tax implications you weren't expecting. Over the years, Realty Income has paid out dividends that have been classified into three categories: Ordinary income, nontaxable ...

and more »
Google News

10 Tax Tips to Reduce Costs and Increase Income

No one likes paying tax. Everyone understands that tax is... Read More

How To Get An Extension To File Your Business Tax Returns

Yes, the tax season is upon with the first filing... Read More

Understanding Basic Tax Terms

If your like many, you don't always understand what people... Read More

Tax Tips - Which Tax Form Is Right For Me?

IRS Tax forms can be confusing.Am I a 1099 or... Read More

Rental Property Tax Deductions

Own residential rental properties? This article discusses how income from... Read More

Small Business Tax Credit - Americans with Disabilities Act

Many small businesses complain when confronted with the expense of... Read More

Know A Tax Cheat? Get Paid To Tell The IRS

According to the IRS, taxpayers underpay their taxes by some... Read More

Taxing Overseas Firms for SOX Compliance

The Sarbanes-Oxley Act, also called the Public Company Accounting Reform... Read More

1031 Exchange Rules and Requirements

Following is a reproduction of the IRS's rules and requirements... Read More

Tax Reduction Tips

In the rush to get tax returns prepared and filed... Read More

Truly Bizarre Taxes: The Tax on Illegal Drugs

One can never underestimate the enthusiasm that politicians have for... Read More

Section 179 ? Tax Relief From Depreciation Rules

"Depreciation." For business owners, this word is the one most... Read More

Are You An Innocent Victim of These Popular Myths?

Misconceptions, misinterpretations and just plain "untruths" are floating about income... Read More

E-commerce Taxation

The means and types of businesses have transformed with advent... Read More

Six Urban Myths About Taxation

Six Urban Myths ? Taxation"I am proud to be paying... Read More

Amending Procedural Laws for Collection of E-taxation

The electronic transaction ordinance defines the certificated copies in which... Read More

Requirements To Produce Tax Information (Whats Up With That?)

"What we've got here is a failure to communicate." ... Read More

Identity Theft ? Impacting Your Taxes?

If your identity is stolen, your finances can quickly become... Read More

Tax Deductions - Mr. C.P.A. Can I Deduct a Pizza? You Too Can Deduct Your Fun By Using Tax Tips

Recently, I stumbled across a concept that could change your... Read More

Fraudulent Tax Shelters ? KMPG Goes Down Hard

In the largest criminal tax case ever filed, KMPG has... Read More

How To Claim CHILD TAX CREDIT The Right Way And Add An Extra $2,000 To Your Refund

The U.S. Department of Agriculture estimates that it costs nearly... Read More

Tax Records - What You Should Keep And For How Long

Many taxpayers are confused about how long they should keep... Read More

IRS Offer-in-Compromise, Hype or Hope?

"Settle for Pennies on the Dollar! IRS debts settled for... Read More

Tax Tips for Home-Based Business Owners

As tax time approaches, many home-based business owners begin completing... Read More

Tax Tips to Save Money on Taxes - Get the Corporate Kick and Save Loads of Money

Why a Corporation Helps Save You TaxesThe Tax Rates (Notice... Read More