Tax Issues For Self Employed Individuals

Tax Issues for SelfEmployed Individuals
The United States is​ a​ nation of​ entrepreneurs. There are literally tens of​ millions of​ selfemployed 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 selfemployed 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​ selfemployed 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​ selfemployed 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.
HomeBased Business
Many selfemployed 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 selfemployed individuals find themselves working more than the​ traditional 40hour week,​ there are a​ significant number of​ advantageous deductions that can be claimed. Unfortunately,​ we find that most selfemployed individuals miss these deductions because they are unaware of​ them.
SelfEmployment Taxes the​ Bad News
A negative aspect to​ being selfemployed is​ the​ selfemployment tax. All salaried individuals are subject to​ automatic deductions from their paycheck including FICA,​ etc. in​ that many selfemployed individuals often do not run a​ formal payroll for themselves,​ the​ government must recapture these taxes through the​ selfemployment tax. Simply put,​ you​ are required to​ pay selfemployment 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​ selfemployment tax. Simply put,​ you​ are allowed to​ deduct onehalf of​ your selfemployment taxes from your gross income. For example,​ if​ you​ pay $10,​000 in​ selfemployment taxes,​ you​ are allowed a​ deduction on​ your 1040 return of​ $5,​000. Many selfemployed individuals miss this deduction and pay more money to​ taxes than needed.
Health Insurance Deduction
This used to​ be a​ very messy area for selfemployed 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 selfemployed 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​ selfemployed 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.
Tax Issues For Self Employed Individuals Tax Issues For Self Employed Individuals Reviewed by Henda Yesti on July 01, 2018 Rating: 5

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