Tax Tips for the Self Employed
Tax Tips for the Self-Employed By R.L. Fielding
If you are self-employed, it's important that you take control
of your finances and become aware of the changes that can affect
your taxes. But how do you know if you are considered by the IRS
to be self-employed? And if you are, what should you know? The
following is a comprehensive list of answers to these questions
and others regarding things that all independent contractors,
small business owners, and other self-employed people ought to
know:
First, find out if you are considered to be self-employed.
Generally, you are self-employed if you:
* Operate as an independent contractor * Are the sole proprietor
of a business or you practice a trade * In some way or another
are in business for yourself
If you meet these criteria, there are a number of important
things to know about your taxes, including:
* Up to 100 percent of medical insurance costs paid by
self-employed individuals, covering themselves, their spouse,
and their dependents, may be deducted as an adjustment to income
on Form 1040, U.S. Individual Income Tax Return. The deduction
is subtracted directly from total income and applies whether or
not a taxpayer itemizes. * If you use your vehicle for business
purposes, you may be able to deduct expenses associated with
such use. To do this, you must keep track of the business miles
and total miles you drive during the year. You may choose the
actual expense method or use the standard mileage rate. If you
choose the actual expense method, you must also keep track of
your vehicle-related expenses for the year. Vehicle related
expenses include gas, oil, insurance, repairs, cleaning,
registration, etc. The business portion of your personal
property taxes and vehicle loan interest is also deductible. *
You may be entitled to a tax break if you are operating a
business from your home. o Is this part of your home used
regularly and exclusively in conjunction with your business or
work? o Is it your principal place of business? o Is it where
customers and clients meet with you? o Is it where you store
product samples? o Is it where you administer or manage your
trade or business?
If so, you may be able to deduct certain depreciation and
operating expenses. The same might apply to a separate
structure. * You may recover your investment in certain
business-related properties (such as equipment, a vehicle, or a
building) through the use of depreciation. Through depreciation,
you will deduct some of your cost on each year's income tax
return. If you do not take the depreciation, you lose it and
when you sell the property, the IRS calculates the basis as
though you had taken the deduction each year. If you have not
claimed or have under-claimed depreciation deductions on
property placed in service in prior years, you may be able to
fully recover all allowable depreciation by filing amended
returns for the years in question or by changing your accounting
method. * Up to $102,000 (for tax-year 2004) of certain tangible
business property may be deducted in the year it was placed in
service rather than using the depreciation method (section 179
expensing). The maximum amount that may be deducted for
qualifying enterprise zone, renewal community, and Liberty Zone
property is $135,000 (for tax-year 2004). * Your employees'
wages and salaries are deductible if paid during the tax year
for work directly related to your business and if the pay is
reasonable, considering the nature of the work. You must be able
to verify that the payments were made for duties actually
performed. There are various types of withholding for different
types of employees. Specific forms must be used for reporting
payments made to employees. * You may be able to deduct expenses
for a leased asset such as a car or computer used in your
business. If it is not used solely for business purposes, you
may deduct only the percentage of use that applies to your
business or work. * Business tax credits can reduce your tax
liability. There is a credit for providing access to the
disabled and a work opportunity credit for providing work for
members of groups with special employment needs or higher
unemployment rates. * Freelancers who qualify to use Schedule C,
Profit or Loss from Business, can report their deductible
business expenses on that form. If these deductions were taken
on Schedule A, Itemized Deductions, they would be subject to the
2% of adjusted gross income limitation. * Costs that you have in
setting up an active trade or business, or investigating the
possibility of creating or acquiring a business, are business
start-up costs. These costs are amortized rather than
depreciated. Franchise fees, goodwill, and customer-based
intangibles are also amortizable. * If you are an accrual-basis
taxpayer and you have been unable to collect money owed to you
or your trade or business, you may be able to deduct it on your
income tax return. You must have previously included the money
owed as income so that you have a tax basis in the debt. A
cash-basis taxpayer normally does not report income until they
receive payment so they cannot deduct a bad debt. * The tax
implications of a self-employed individual are different from
those of an ordinary wage earner. Each situation may present a
number of complex tax questions. Here are some of the things you
need to take into consideration: o How much Social Security and
Medicare taxes, FUTA taxes, and workers' compensation insurance
will you pay? o Will you have more than one trade or business? o
What if your attempt to operate a business fails? o Should your
financial calculations be based on a calendar year or a fiscal
year? * Starting January 1, 2004, certain individuals who are
covered by a high deductible health insurance plan may be able
to contribute to a health savings account (HSA). With this
account, contributions are deducted from your gross income when
calculating adjusted gross income, which means you do not need
to itemize deductions to take advantage of this deduction.
Additionally, distributions are not taxable if used for
qualified medical expenses. The first time a HSA can impact your
income tax return is in tax-year 2004
Because there are so many factors to consider when filing as
someone who is self-employed, it may make sense to have a
professional file your taxes for you. There are many benefits to
doing so, including:
* A tax preparer can offer income tax help
(http://www.jacksonhewitt.com/tackle.asp) and ensure that you
get the maximum refund to which you are entitled as quickly as
possible with a paper return or electronic filing. * You have
the option of electronic tax filing
(http://www.jacksonhewitt.com/resources_library_topics_efile.asp)
. To use electronic filing, you must have a valid Social
Security number for every person included on the return. IRS
e-file