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Self-Employed Tax Traps

Self-employment is a terrific opportunity to be your own boss, do something you love and build value over time. Being your own business also brings with it a unique set of tax advantages and tax pitfalls that you need to know about.  For example, you’ll need to pay your own FICA taxes and take charge of your own retirement plan, among other things.

Here are some tax tips and traps for the newly self-employed:

Avoid a Self-Employment Tax Surprise. Self-employment first-timers often trip on this one.  When you have a job, your employer pays half of your social security taxes and you pay the other half. When you’re self employed, however, you pay it all – making both Social Security and Medicare payments (jointly known as FICA taxes) through the self-employment tax.

According to the California Society of CPAs, if you file a Schedule C as a sole proprietor, the net profit listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your federal Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.

Pay your own “Withholding.” Instead of having taxes automatically withheld from your paycheck, you’ll now be responsible for pay-as-you-go taxes in the form of “estimated tax.” You’ll need to make quarterly estimated tax payments using Form 1040-ES to cover your federal income tax and self-employment tax liability. You might have to make state estimated tax payments, as well. If you don’t make estimated tax payments, you may be subject to penalties, interest, and a big tax bill at the end of the year.

Hire Family Members to Save Taxes. Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn’t seem reasonable, considering the services performed. Also, when hiring a family member who’s a minor, be sure that your business complies with child labor laws.

If your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won’t be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as state taxes.

Set up a Self-Employed Pension Plan. The ability to set up a generous, tax-advantaged retirement plan is one big benefit being self employed. Possibilities include: Keogh plans; Simplified Employee Pension (SEP); SIMPLE IRA; SIMPLE 401k or an Individual (solo) 401k.

Enjoy all Your Business Deductions. You can deduct a wide range of business expenses, including rent or home office expenses, and the cost of office equipment, furniture, supplies and utilities. “To be deductible, business expenses must be both ordinary (common and accepted in your trade or business) and necessary (appropriate and helpful for your trade or business),” says the California Society of CPAs.  If expenses are part-business and part-personal, you can still deduct the business portion. You can also deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction.

Deduct Health Insurance Costs. You can also benefit from the self-employed health insurance deduction, which lets you deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040 when computing your adjusted gross income, so it’s available whether you itemize or not.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved. 

Guide to 2011 Tax Forms and Answers

Finding the right tax forms quickly and getting business tax questions answered accurately are tricky problems for many business owners. There’s hardly a time of year when there isn’t some tax-related deadline, either federal state or local.

The best help that BizBest has found actually comes from the Internal Revenue Service itself.  Yup! Contrary to popular belief, the IRS, and its website in particular, is a good place to find what you need quickly. The agency has a special Small Business and Self-Employed Tax Center online that provides easy access to all of the forms, publications and tax matters vital to different types of small businesses and the self-employed.

At the center-top of the home page you’ll see a link to “Filing Season Central” which is a nicely organized help center for filing your business returns.   One of the most helpful features is a roundup of the many tax law changes affecting small business, along with tax tips. Another item you’ll find helpful is the 2011 Tax Calendar for Small Business and Self-Emloyed. It’s a PDF file with a complete rundown of forms and deadlines due throughout the year.

Information at the IRS small business site is well-organized, remarkably light on “gov-speak” and nearly all free (well, not quite, since your tax dollars did pay for it). A service call FreeFile helps you prepare and file your federal taxes online, for free. Here are some of the other things you’ll find at the small biz tax site:

  1. An A-to-Z index for business making it easy to find what you need on any tax-related topic.
  2. A quick and easy online way to get an Employer Identification Number (EIN), free.
  3. An online learning center with videos, articles and online workshops that can help you with your small business or self-employed tax questions.
  4. A list of local, tax-related small business events, with links to times, dates and contact information.
  5. Information on how to know is someone who works for you is an independent contractor or will be considered a “employee” by the IRS (and thus subject to withholding and other taxes).
  6. A helpful publication called e-News for Small Business.
  7. Links to state-by-state tax information for small business (just click on your state).
  8. Information on business name changes, retirement plans, and more.

You can locate and download IRS forms and publications several different ways:

1) By form and instruction number

2) by publication number

3) by topical index

4) by using a directory list of file names

The IRS Alternative Media Center has forms in Braille, text format and even talking tax forms.

For speed and simplicity, view the small business tax publications and form instructions you need online via your web browser, or open them in PDF format. Reach the publications list directly at For instructions on filling out forms, go directly to

If you need hard copies, you can print them out yourself, or order what you need online for mail delivery from this forms and publications page, or  Forms and Publications for Employers. You may order up to 10 different products for delivery by U.S. mail. You’ll receive two copies of each form and one copy of any publication.

Or forget forms entirely and go paperless with electronic IRS fill-in forms. These are official IRS forms in PDF that let you fill in your information directly to the PDF form. It’s not a spreadsheet, however, so it won’t calculate or verify the information you enter. Get these from the “Fill-In Forms” section on the Forms and Publications page.

The free web-based Virtual Small Business Tax Workshop is a great way to get up to speed on tax requirements of running a small business.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved. 

Tax Law Changes You Should Know

The politicos have done their thing again, stitching together a patchwork of small business tax changes that aim to nudge business owners toward spending and hiring. This one’s called the Small Business Jobs Act of 2010 (SBJA) and it’s a wide-ranging mash-up of tax incentives and other changes you need to know about.  Here’s a rundown some key changes in the new law:

  • Extends bonus depreciation
  • Extends and doubles Section 179 expensing
  • Provides 100 percent gain exclusion for qualified small business stock
  • Allows five-year carry-backs of the general business credit for qualified taxpayers
  • Enhances the deduction for start-up expenses
  • Allows a self-employment deduction for 2010 health care expenses
  • Increases failure-to-file penalties on information returns
  • Establishes a new information reporting rule for rental property expense payments

Bonus Depreciation Returns

A highly-popular provision allowing first-year, 50 percent “bonus depreciation” that expired in 2009 is back.  The SBJA reinstates bonus depreciation for most property through 2010, and for certain longer-lived property and specific types of transportation property through 2011. Eligible property generally includes new depreciable property with a recovery period of 20 years or less; computer software, and; qualified leasehold improvements. The new law also extends the $8,000 increase in luxury auto depreciation limits on property eligible for bonus depreciation.

With only weeks left in the year, tax experts at the accounting firm CBIZ question how much additional investment this provision will create.  But for business owners who’ve already made eligible investments during 2010, it’s a windfall.

Expensing Election Extended

Under prior law, the Section 179 expensing election allowed businesses to immediately expense (write off) up to $250,000 of tangible personal property placed into service in the 2010 tax year. The deduction would begin to phase out when eligible purchases exceed $800,000. SBJA enhances this deduction in several ways for assets placed in service in tax years beginning in 2010 and 2011:

  • The maximum amount subject to the election is increased from $250,000 to $500,000;
  • The phase-out starting point is increased from $800,000 to $2 million, and;
  • Businesses may elect to expense up to $250,000 of qualified leasehold improvement property, restaurant property, and retail improvement property.

According to CBIZ, this provision marks the first time that the expensing election has been extended to any type of real property.

Gain on Sale of Small Business Stock:

Historically, 50 percent of the gain from the sale of qualified small business stock held at least five years could be excluded from income, but remained subject to the alternative minimum tax. The remaining 50 percent of such a gain was taxed at 28 percent. The exclusion percentage increased from 50 percent to 75 percent for qualified small business stock acquired after February 17, 2009 and before 2011.

SBJA increases the exclusion from 75 percent to 100 percent for qualified small business stock acquired after the enactment date and before 2011. In addition, there is no alternative minimum tax imposed on any gains eligible for the 100 percent exclusion.

While the 100 percent exclusion is a significant tax benefit, taxpayers must act quickly because they only have until the end of the year to acquire the qualifying stock.

Startup Expense Deduction Increased

Generally, taxpayers may deduct only $5,000 of startup costs, subject to a phase-out threshold of $50,000, and the remainder must be amortized over 15 years. The new law increases the maximum deduction to $10,000 and the phase-out threshold to $60,000. But this provision only applies to startup costs incurred in 2010.

Self-employment Tax Break on Health Insurance

Under prior law, individuals subject to self-employment tax could not deduct health insurance for purposes of computing net earnings subject to self-employment tax. But for the 2010 tax year only, taxpayers will be allowed to reduce their net self-employment income by the cost of their health insurance.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.