Self-Employed Tax Issues - Get Off To A Good Start To Grow Your Business

Posted: 30 Jan 2008 | Categories: Taxes

Have you ever noticed how many small businesses and entrepreneurs there are? There are millions of Americans who are self-employed and enjoy pursuing their dream. Others have a dream of starting and owning their own business. Through it all the one thing no one enjoys in owning their own business is the paperwork and tax issues that arise from being self-employed.

If you are not incorporated, and being self-employed you are considered a “sole proprietor” or an “independent contractor” for both legal and tax purposes. You will report business sales or revenues on your personal tax return. Here are some issues and guidelines you should consider as you run and manage your business.

You will be required, as a self-employed individual, to report you business profits or losses on Schedule C of Form 1040. Your net business income is taxable to you as an individual. Don’t make the mistake made by one misinformed individual who was netting about $10,000 a year and “investing” the income in collectibles. Since she thought she was not withdrawing any money from the business she had no tax liability. The IRS showed her the error of her ways, after an extensive audit, by hitting her with a large tax bill which included interest and penalties.

From your gross revenues or sales you can deduct reasonable business expenses incurred in generating the business revenue. In the event of expenses exceeding revenue the business loss will generally be deductible against your total income from other sources. There are special rules relating to whether your business is considered a hobby and if you have anything “at risk.”

If you are self-employed and you work our of your home you are entitled to deduct a portion of the cost of the home based on the portion of the home used in the business-such as an office or storage of inventory. Other payments such as utilities can also be prorated. If you deduct as a housing cost a portion of your property tax, for example, be sure to subtract the amount from the total property tax that you might claim if you itemize your deductions.

Working out of your home and if you have an additional work area at another location you may be able to convert your commuting expenses between the two locations into business expense. Many self-employed individuals miss these deductions because they are unaware of them or they do not keep appropriate records to claim the deductions.

They are subject to the Social Security self-employment tax (FICA). As a self-employed individual you must pay 15.3% tax on your net earnings up to $97,500 in 2007 and $102,000 in 2008. All net earnings (with no limit) above the yearly maximum are subject to a 2.9% Medicare tax.

You are allowed a partial deduction of any FICA taxes paid. You can deduct one-half of your FICA taxes from you gross income. If you pay $8000 in FICA taxes, for example, you may deduct $4000 from your gross income. In several studies of tax returns many miss this deduction and therefore pay more in taxes than required.

Another tax deduction that has changed in recent years is the deduction of health insurance costs. Now you may deduct 100% of your health insurance costs as a business expense.

A potentially dangerous problem of being self-employed is the failure to pay required quarterly estimated tax payments. They are estimates that can be adjusted as your tax year progresses. If you fail to make the required quarterly tax payments and you reach the end of the year without sufficient funds to pay your taxes this could develop into a severe problem.

By planning ahead you can keep this potentially costly event from happening.

If just starting out in business or you’ve been in business a number of years maintaining complete records of all your business transactions will allow you to properly manage the business. By documenting every expense and by periodically (at least monthly) tracking individual expenses this will go a long way in helping manage the expense side of the business. Keep a log of business travel expenses and your vehicle mileage. Whenever, you have any doubt about keeping a record of an expense, do it.

To properly manage a business you must maintain complete records of all business income and expenses. Simply put, document everything.

Andy Andersohn is a small business owner and long time tax preparer. Learn more valuable tax planning resources for business owners and individuals. Get your FREE 11 page Tax Saving Guide. Find up to date tax articles at his tax planning site, and discover more tax help and good ideas.

Article Author :Andy_Andersohn