Tax Tips for the Self-employed

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the you need to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment 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. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. 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.

For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

. . . . or call us for a personalized conference to discuss your business recordkeeping and tax requirements.

Links:

Publication 334, Tax Guide for Small Business

Publication 535, Business Expenses

Publication 505, Tax Withholding and Estimated Tax

Schedule C, Profit or Loss from Business and instructions

Schedule C-EZ, Net Profit from Business

Schedule SE, Self-Employment Tax and instructions

Form 1040-ES, Estimated Tax for Individuals

Pay Your Children for Business Chores

Pay Your Children for Business Chores I am astonished by how many business owners overlook the simple tax strategy of hiring their children. The benefits of the hiring vary by the type of tax return that you file, as you will see below. Did your under-age-18 children help you in your business this year? Did you pay them for their work? You should. Why? First, wages paid by the parent to the parent's under-age-18 child for work done in the parent's business are both1 deductible by the parent, and exempt from payroll taxes. Thus, if you operate your business as a proprietorship, you face no payroll taxes on the W-2 wages you pay your under-age-18 child. Second, your child can use the 2011 standard deduction to eliminate taxes on up to $5,800 in wages. Third, your child can contribute up to $5,000 to a tax-deductible IRA and exclude that amount from taxable wages. Example. Your child is age 14, and she has no earned income other than what she earns from you. You pay her $10,800 in fair market wages for work she actually does during the year. You deduct the $10,800 and pocket $4,320 because of your 40 percent tax bracket. Your daughter collects the $10,800 and pays zero federal income taxes because The IRA deduction removes $5,000 from taxable income, and The standard deduction removes $5,800 from taxable income. Your family unit has $4,320 in additional spendable cash. Key point. To avoid payroll taxes, the wages paid by the parent to the child must be on a W-2. If you use a 1099, you destroy payroll tax benefits because your recipient child will pay self-employment taxes on the 1099 income. Corporation or LLC. If a corporation does the hiring, both your corporation and your child face payroll taxes. The same is true with an LLC because the law treats the LLC as a corporation for payroll taxes. Paying payroll taxes is not a deal breaker for the strategy, but it does reduce the net family benefit. It is also a negative when considering the corporation or the multi-owner LLC as a possible choice of business entity. Ask me for an article titled "Big Tax Breaks for Hiring Your Child" written by Murray Bradford, CPA " for additional insights into this strategy. Planning note. The kiddie tax does not apply to the child's wages. The kiddie tax applies to unearned income, such as dividends, interest, rents, etc. ********************************* The real point is that good tax planning produces cash and builds net worth. In the example above, the family unit gained $4,320 in after-tax cash from hiring the child. If the child works for the parent for 10 years, the family unit gains $43,200 in after-cash, a nice addition to the investment or college-fund portfolio.

Do I Need to File a Tax Return This Year?

ed@EdSlovacekCPA.com

www.EdSlovacekCPA.com

979-846-4667

Do I Need to File a Tax Return This Year?

You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren't required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

To find out if you need to file, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040, 1040A or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

Even if you don’t have to file for 2011, here are six reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

For more information about filing requirements and your eligibility to receive tax credits, give our office a call at (979) 846-4667 or email us at info@EdSlovacekCPA.com.