Self-Employed tax tips

Tax Return

Image courtesy of FreeDigitalPhotos.net and MisterGC

Note: I do not now, nor have I ever worked as a tax attorney. Make sure you consult one so that you are aptly informed of the current laws and don’t get carted off to jail for tax fraud!

Government loves people who are self employed! According to the 2010 US Census, there were 27.9 million small businesses, with over 75% of those being non-employers: independent contractors, or what I like to call: solopreneurs.  Sure we have our huge corporations…approximately 18,000 businesses in the US employ more than 500 people, but its the little pizza guy on the street, or the farmers at the Saturday market that really make this country hum.

Because of that, good old Uncle Sam is happy to give benefits and allowances to the self-employed. As an employee, you generally get around three tax deductions: Your home, your kids, and college tuition…there may be more depending on your specific situation, but not much.

When you are self-employed, you can deduct everything you need for your business, including: your cell phone, your answering service, your computer, Internet access, printer, ink cartridges, mileage, food for business meetings, entertainment for clients, pens, paper, clipboards, other office supplies, parking fees, utilities, travel expenses, training and education…and much much more.

These are PRE-TAX deductions. That means that you can take off your expenses from your income and pay your tax as a percentage of the balance.

Each deduction is weighted differently. Some you can take at it’s full 100% value as an expense of doing business, (like legal fees to set up your business) but other deductions, like business lunches, you can only take 50% since the government feels that you would have had to eat anyway. Some deductions, like computers, you can only take a depreciation each other. Others, like utilities, need to be factored as a percentage of your use: what you need for your personal use vs. your home office use.  Make sure that you talk to a reputable tax professional to get the proper deductions for your specific situation.

To give a simple example of calculating the tax you may owe, let’s say you made $10,000 in a year from being self-employed. Hopefully you’ll do much better than that, but let’s keep it easy:

If you make $10,000 and have $4,000 worth of deductions, (as properly determined by your tax helper person) that leaves you with a $6,000 net income. That is the amount that you will have to pay taxes on. I like to generalize a tax rate of about 30%, (13.3-15.3% Social Security/Medicare plus your Federal Tax rate.) Yours may be more or less depending on other factors in your life, but a 30% tax rate is pretty generous to plan for. And so, 30% of $6,000 is $1,800. That is the approximate amount you would owe in taxes: $1,800.

Let’s say you make $10,000 and have $15,000 worth of deductions. (It’s very common in the first few years of starting  a business to have more expenses than you do in income.) $10,000-$15,000 = -$5,000. Because you have a negative income, you don’t have to pay taxes on that income. However, you will not get any money back in this situation. You generally need to pay money in to the system, in order to get a return. And, depending how much you have paid throughout the year, you still may have to pay the self-employment tax.

If you’re concerned that you’ll be cited for not having a positive income, the government is surprisingly understanding as long as you show that your business is growing. Usually it isn’t until after seven years of not turning a profit (having more in deductions than you do in income) that they will declare your business a hobby and take away your tax deductions. But, if you keep good records and show growth, even minimal, they surprisingly supportive.

There are a couple of different ways to limit your tax liability. One is to take as many deductions as you possibly can for your business, (legally and ethically, of course) and the other is to pepper your IC/1099 income with traditional W2 employment income. I do this through random gigs at temp agencies, (they consider me an employee) as well as when I’ve worked for King County elections, and taken on some clients that prefer to pay me as an employee. I welcome the status of being an employee for tax purposes, as long as I have freedom and flexibility in that role.

Not sure if you should be considered an employee or IC? Read On…

When you’re working as an independent contractor, your clients are required, by law, to send a 1099 form to Uncle Sam if you make over $599 in one year. If you make less than $599 in a year, they will NOT send a 1099, but you are still required to claim that amount as income. Start keeping track of everything. I file away all of my receipts, organize them, and then I go to my tax lady, who makes everything pretty for me.

The categories I have for my businesses are:

  • Accounting: For my fabulous tax-lady, who does all the dirty work for me.
  • Advertising: For newspaper ads, flyers, Web ads, and other promotional goods.
  • Art materials: For designing my puppets, and other art goods.
  • Associations: Dues for any professional organizations that I belong to.
  • Charities: Donations to my favorite charities.
  • Credit Card Processing Fees: When I receive payment through Paypal or other processing companies, I generally have to pay a fee of 2-3%. These fees are tax deductible.
  • Entertainment: When I have to schmooze clients, potential clients, and others.
  • Health: My healthcare costs.
  • Legal: Any kind of legal fees you have to pay. You may need a lawyer for contract help, submitting copyright forms, drawing up leases, or other issues. And yes, prepaid legal counts!
  • Mileage: Wherever you go to that’s business related, TRACK IT. You get around $0.55 a mile! You do need to show a mileage log, so make sure you keep one in the car.
  • Office supplies: For pens, paper, printer ink, file folders, etc.
  • Parking and tolls: When I’m on the road on business and have to pay these fees.
  • Printing and copying: For pamphlets, brochures, flyers, etc.
  • Post office needs: Stamps, post office box rental, mailers, etc.
  • Rent and Utilities: For my office space. (If you work at home, you can only deduct a room if it is SOLELY used for business purposes, and you can deduct a portion of your utilities if you have a home office as well. Talk to your tax-lady to see how much.) If you have any storage space for business, this can be deducted too.
  • Independent Contractor fees: When I have to hire others to get work done for me. I don’t hire employees because the work I have is too erratic, so luckily I don’t have to pay their employment taxes either.
  • Training/education: Any classes I take, books I buy, or materials that help me learn more about my business.
  • Travel: When I go on vacation, I make sure it’s a working vacation and network with people and businesses on my trip. Then, it’s partially deductible!
  • Utilities: For my office space: phone, cell phone, Internet access, electricity, heat, etc.
  • Website: Design, hosting fees, maintenance fees, etc.

Why wouldn’t you be self employed? Even if its just a little side business of selling Avon, or on Ebay, the tax benefits alone are enormous.

 Think about all the extra money you could make by being a mystery shopper, starting your own business, or working from home for a legitimate company.  Take control of your income and check out our LEARN page for a list of classes, books, and more!

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