Home
>
Tax
>
Small Business Tax Issues for Self-Employed Individuals

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.

executive chauffeured services Bradford .. Madison to Airport car

In The News:

Getting virus alerts on your iPhone? Tech expert Kurt “CyberGuy" Knutsson helps you learn how to handle fake scam alerts and boost security.

Tech expert Kurt “CyberGuy" Knutsson says opening emails is safe, but risks arise from interacting with links, attachments or HTML content.

Tech expert Kurt “CyberGuy" Knutsson reveals four signs of compromised Social Security numbers and offers five steps to protect yourself.

Tech expert Kurt “CyberGuy" Knutsson discusses how MAB Robotics' Honey Badger 4.0, a versatile robot, now walks underwater with amphibious skills.

An updated Android trojan called FakeCall hijacks bank calls. Tech expert Kurt “CyberGuy" Knutsson says Android phone manufacturers and Google need to step up their game on security.

The Massimo Modular E9 is a sleek, smart and comfy tiny home in 409 square feet. Tech expert Kurt “CyberGuy" Knutsson takes a closer look at what the future of housing might look like.

Every stock trader should consider a virtual private network to safeguard their trading, according to tech guru Kurt "CyberGuy" Knutsson.

Apple recently announced its new lineup of Macs and rolled out Apple Intelligence, its latest artificial intelligence-powered feature for its products.

A Swiss-engineered robot can climb ladders, showing why it's at the cutting edge of autonomous robotic solutions for harsh industrial settings.

Kurt "CyberGuy" Knutsson presents the cities targeted most by robocalls, why this is happening and what you can do about it to protect your privacy.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents

Kurt "CyberGuy" Knutsson shares tips and suggestions for how to get the best use out of the updated Calendar app available with the latest iOS update.

Your Social Security number, your unique identifier used for many purposes, has likely been leaked on the Dark Web; here are some steps you can take to protect yourself.

Researchers have developed a new technology that creates strong, sticky fibers capable of lifting objects and capturing things from a distance.

Smart rings track the same things that smartwatches do, including steps, sleep and a general overview of your overall health, and they tend have more battery life than smartwatches.

Researchers have developed a robotic finger that can perform routine medical exams like those conducted by doctors, helping to address the growing shortage of trained professionals.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Insurance administrative services company Landmark Admin reported that a data breach from a May cyberattack affected over 800,000 people.

Sotheby's will auction the first artwork created by Ai-Da, the world's first robot artist created in 2019 by British gallerist Aidan Meller.

More than 250 million users of the Verizon Messages app will have to switch to another app. Verizon is shutting down Messages in the next month.

Tech expert Kurt “CyberGuy" Knutsson provides a list of 10 celebrities who are the most targeted by deepfake scams, including Tom Hanks.

Tech expert Kurt “CyberGuy" Knutsson discusses how Vast's Haven-1, launching in 2025, transforms space living with human-centric design.

UnitedHealth confirms over 100 million Change Healthcare users had their data stolen. Kurt “CyberGuy" Knutsson reveals what happened and what caused the breach.

Tech expert Kurt “CyberGuy" Knutsson explains how iOS 18 brings new text formatting and animated effects to the Messages app.

Whether you're a social media veteran or novice, Facebook friend request scams are common. Kurt the CyberGuy provides tips to keep your account safe.