Starting Your Own Business? What You Need To Know About Your Taxes

 

starting your own business

Ditching the 9-5 world is something that most of us dream about. If you’ve been fortunate enough to leave the 9-5 world behind to start your own business, your tax outlook will change considerably. Here is what to expect in starting your own business:

Obtain an EIN (Employer Identification Number) While an EIN isn’t required if you’re a sole proprietor, it is a good idea. You’ll reduce your risk of identity theft if you use your EIN instead of your Social Security number when filing your taxes.

Choose a business structure: While it’s important to consult with an attorney prior to launching a business, there are four possible business structures to consider:

  • Sole proprietorship
  • LLC (Limited Liability Corporation
  • Partnership
  • C or S corporation

Each business model carries with it specific implications for your taxes, so it is vital that you enlist a qualified attorney or tax pro before starting out. They can advise you on the best business model to suit your needs and goals.

You can restructure your business as your needs and goals change over time.

Common deductions

As a business owner, you may have access to tax deductions that weren’t available to your in your 9-5 days. They can include:

  • Business-related meals, travel, and entertainment
  • Business-related auto expenses
  • Rent of office space or for home office use
  • Office equipment
  • Health insurance costs for your employees
  • Start-up expenses

You’ll need to keep accurate records of all income and expenses in order to claim any of these deductions. Keep all receipts related to your business deductions.

There is a variety of productivity software packages and apps that can help you keep this chore manageable over time.

Quarterly tax payments

Unlike the traditional work structure where you paid your taxes at the end of the year, as a business owner you are required to pay quarterly taxes if:

  • Your business is a sole proprietorship, partnership, or S-Corp shareholder
  • You expect to earn $1,000 or more from business activities

You are required to pay at least 90 percent of your tax balance in order to avoid significant fees and penalties. If you’re not sure how to calculate your quarterly taxes, be sure to consult with a qualified tax professional.

Starting your own business can be rewarding: no set schedules, no office politics, and the ability to perform work you truly care about.

Along with the rewards of small business ownership come a unique set of challenges: determining the ideal business structure, managing expenses and deductions, and a significant change in how and when you pay taxes.

Make the start-up phase of your business as easy as possible by consulting with a knowledgeable tax professional who can provide valuable input as you structure your business and establish yourself as a business owner.

 

Did You Work For Cash In 2015? Check Out These Tips

If you worked for cash in 2015, here are some important tips

cash

Note: The advice in this post is not intended to replace the advice of a qualified tax preparer. Always seek professional input before preparing your own taxes.

Most of us at one time or another earn extra cash with a side gig. While this can help your bottom line, there are tax implications.

The 1099 form: If you worked for an individual or organization for cash, they must issue you a 1099 form if you earned over $600.00. You will need to report your earnings on your income tax form under “Misc. income.”

In some cases, a client or employer who paid you cash will go ahead and issue a 1099 even if you earned less than $600.00. This is preferable because record-keeping will be easier for you and there will be less chance of errors in reporting your income.

Either way, employers must mail out these forms  no later than January 31st, so if you have not yet received yours, follow up immediately with your client or cash employer.

Why the 1099 is important: If there is a discrepancy between the earnings you reported to the IRS and the earnings reported by your client(s) and employer(s), processing your tax return will be delayed, along with any refunds.

At the same time, if the employer doesn’t report your earnings to the IRS, they, too, could face additional scrutiny and delays.

At the very least you’ll receive a letter from the IRS requesting correct information. At the very worst, it can trigger an audit or review.

If you’ve kept track of your earnings from each client and employer, be sure their income figures match your records.

Income and expense records: If you earned cash from a side gig in 2015, you’ll not only need to report your income, but you will also need to report your expenses.

Your tax preparer will attach either Schedule C or C-EZ to your tax return. If you are taking the DIY approach and filing your own taxes, you’ll need to complete Schedule SE to calculate your self-employment tax.

Keeping accurate income and expense records is key to filing an accurate return as well as calculating the correct amount of taxes you will owe. There are many apps and software programs that can help you track income and expenses such as Quickbooks, Harvest, or Excel.

Estimated Taxes: The amount of estimated taxes you may need to pay this year are based on your earnings in 2015. These taxes can be paid in quarterly installments or all at once. Your tax preparer can calculate your estimated tax.

Working for cash is a great way to help make ends meet. If 2015 was your first tax year working for cash, tax day will be different for you than in years past.

Have your taxes done by a professional and bring all of your 1099 forms, income/expense records, and any other documentation your tax preparer requests from you.

Don’t let the prospect of paying self-employment taxes scare you. Your tax preparer can help you in determining your estimated tax for this year.

You’ll avoid “sticker shock” and will be able to stay on top of your taxes. You’ll also avoid over-paying estimated taxes so you can keep the money where it belongs: with you.

By keeping accurate income and expense records you can make your side gig work for you and not for Uncle Sam.

 

 

 

Self-Employment Tax Tips

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Working as a freelancer had its advantages: more control over your time and who you work for. No time clocks or strict dress codes. No need to fill out a triplicate form to request a half day off for that doctor’s appointment. In other words, lots of perks.

Self-employment or freelancing also has its downsides, whether you run a business with employees or are a sole proprietor. For one thing, there’s no payroll department to deduct taxes on your behalf, so it is up to you to deduct and pay your own taxes on time each year.

First, the basics…

Self-employment taxes represent the Social Security and Medicare taxes that are normally deducted from a worker’s paycheck. The employer pays half, and the employee has the other half deducted from their check each pay period. The employer submits both parts each quarter, and these are the taxes that fund the Medicare and Social Security that workers typically draw from when they reach retirement age.

If you’re self-employed, however, you’ll be responsible for both parts. In essence, you’ll be paying twice what your employer deducted from your paycheck each payday.

The IRS calculates your Social Security and Medicare taxes by using a fixed percentage based on your net income (income after expenses are deducted). Let’s suppose your net self-employment income for the year was $10,000.00. Your self-employment tax would be $1530.00 or 15.3 percent of $10,000.00.

You’ll state this amount when preparing your taxes using Schedule SE.

How to pay self-employment tax:

  • Complete Form 1040, and attach Schedule C “Profit and Loss from Business” along with the Schedule SE.
  • Remit your payment along with Form 1040-V (payment voucher) and include a check or money order along with the voucher.
  • Mail the return to the address specified on the voucher.

If the thought of paying a lump sum each year leaves you cold, you could pay estimated taxes each quarter instead. You’ll send in 1/4 of your total tax liability each quarter. The IRS has more information on how to calculate your estimated taxes.

While there are many advantages to self-employment, the tax aspect can be a headache if you’re caught unprepared. By understanding the basics of self-employment tax, you’ll be in a better position to determine whether this is something you can deal with on your own, or if you’d benefit from consulting with a tax pro, especially during your first year of self-employment.

Either way, self-employment offers a level of freedom and flexibility typically not found with a 9-5, so if you’re in a position to strike out on your own, do so!

Just don’t forget about those pesky self-employment taxes.

Self-Employment Tax Forms For Home-Based Business Owners

Running a home-based business comes with its share of perks: no nasty daily slog back and forth to the office, more control over your time and resources, and the ability to create your own work schedule according to business needs without having to appeal to the office chain of command.

Owning your own business can be rewarding and enjoyable, but you do need to be aware of the different tax forms pertaining to self-employment so your transition from employee to business owner will be a smooth one. 

 Instead of just filing a 1040 EZ form every year and attaching your W2, you’ll need to attach additional forms to your tax return. Here is a breakdown of the three most common tax forms for home-based businesses:

Schedule C: Profit and Loss From Business

The Schedule C attachment is by far the most important tax form you’ll use. In it, you’ll state your business profit and loss figures. You’ll need to report your total revenue for the year, offset by your expenses. The business expenses section is categorized according to the type of business expense. Qualified expenses deductions include:

  • Marketing/advertising
  • Supplies
  • Office expenses
  • Inventory
  • Payroll

Schedule SE: Self-Employment Tax

The Schedule SE form is used to calculate the correct amount of self-employment tax that is due at the time you file your return. Since you don’t have an employer, you’re required to submit both portions of the Social Security and Medicare taxes (FICA). Here’s how to calculate what you owe:

  • Multiply 92.35 percent of your net profit (after expenses and deductions) by 15.3 percent. This will be your Self-Employment Tax
  • You may deduct half of this amount as an adjustment to income on Form 1040

Form 8829: Business Use of Home

If you operate your business out of your home, you may qualify for the Business Use of Home tax deduction. You’ll need to attach Form 8829 to your return in order to claim this deduction.

  • Calculate the square footage of your office space
  • You can then claim a portion of your home expenses as a deduction based on the office area.

Eligible expenses include:

  • Utilities: water, gas, power
  • Telephone/internet charges
  • Repairs
  • A portion of your rent or mortgage

Here’s the catch: the office space must be used regularly and exclusively for business: your combination gaming area/home office/den won’t qualify.

While this isn’t an exhaustive list of tax forms for entrepreneurs, these are the three most essential forms for you to use, especially if you run your business from your home.

Self-employment tax codes can be tricky, especially if this is your first year filing as a self-employed person. Checking in with a qualified tax pro will be to your benefit, as he or she can advise you on record-keeping, estimated quarterly taxes, and the precise calculations for home office use.

Running your own business can be satisfying in ways you won’t experience  with a conventional job. By staying on top of the change in your tax status and filing the correct forms, your transition from employee to business owner will be a smooth one.

 

Tax Tips For Seasonal Employees

Karl-Erik Bennion/freeimages
Karl-Erik Bennion/freeimages

 

Working a seasonal job–such as during the summer or over the holiday retail season–is a great way to pick up some extra cash and to get ahead on expenses. At the same time, there are some tax implications that you’ll need to be aware of so you won’t experience any “sticker shock” during tax season and the possibility of tax penalties.

If you work in a service profession as either a seasonal job or regular side gig, be sure to record your tips. You’ll need to report those tips as part of gross income for the tax year. Be sure to keep track of them yourself with either a bookkeeping app or a spreadsheet program such as Excel; your boss may not always keep accurate records of their employees’ tips.

If you plan on working more than one seasonal job, you could be dealing with increased tax liability at the end of the year since the IRS requires you to account for all earned income. Make sure each employer deducts the correct amount of withholding based on your filing status and allowance amount. Take a close look at your pay stub each pay period and follow up with payroll or accounting if you have any concerns.

If you pick up a seasonal gig as an independent contractor, you could run up against self-employment taxes. Generally, if you earn $400.00 or more from self-employment, you will need to pay self-employment tax.

You can calculate this tax by using Schedule SE and attaching it to your tax return.

Whenever you take on a side job, it pays to have a solid  understanding of tax withholding as it applies to your unique situation. You may end up having local taxes deducted, in addition to the customary payroll deductions: state income tax, Social Security tax and Medicare tax (shown on your pay stub as FICA). Take the time to read your first pay stub closely so you’ll know what you are in for in terms of your overall withholding.

Taking on a seasonal side job is a great way to pick up some extra cash. A little due diligence will go a long way in understanding your full tax liability and the impact of the extra income on your gross earnings for the year.

Keep a thorough record of any tip income, and take a close look at your pay stubs to get a clearer picture of just how much is being withheld, and if the correct amount is being withheld. If you work as an independent contractor and earn $400.00 or more, you will need to pay self-employment tax at the end of the year.

By fully understanding the changes in your overall tax scenario brought about by a second job or seasonal gig, you can prepare for any additional tax liability instead of getting an unwelcome shock at the end of the year. Be informed, read your paystubs, and you’ll be able to enjoy the true benefit of a side job: extra cash in your pockets.