Check with your state and local authorities to see the requirements to form a business, as well as what type of license, permit, etc. you need to operate there. Each entity type should apply to get a Employer Identification Number (EIN) from the IRS using Form SS-4. You should also check with your state about getting a state tax ID.

Sole Proprietor

In most cases, new businesses operate as a sole proprietorship. When tax time rolls around, if you are organized as a sole proprietor, you will need to complete Schedule C* of the Form 1040 to account for your business profit or loss. Note that if you have $5,000 or less in expenses you may be able to file the Schedule C-EZ instead. The profit or loss from the Schedule C is then transferred to page 1 of the Form 1040, where it is included with your taxable income.

*If your small business income is from rents or royalties, you will use Schedule E. If it’s farming income, you will use Schedule F.

It’s important to keep accurate records of your business income and expenses, as you will be required to report these things on the Schedule C. For more information on starting a business and filing with a Schedule C, see Publication 334, Tax Guide for Small Business. This includes information on EINs, record-keeping, tax year, accounting method, and more.

Partnership, S Corporation, and C Corporation

If you are organized as a Partnership, you file the strictly informational Form 1065. A Schedule K-1 is produced for each partner and then you use that K-1 to determine the income that is reported on your personal Form 1040.

If you are organized as a C Corporation or S Corporation, you should file a Form 1120 or Form 1120S, respectively.

To understand more, be sure to check out these instructions from the IRS: IRS Forms for Partnerships and IRS Forms for Corporations.

Limited Liability Company (LLC)

Some business owners choose to organize under the popular LLC structure. LLCs have a lot of flexibility when it comes to filing taxes. They can be taxed like a sole proprietor (if they have only one member), partnership, or even like a corporation (C or S). If you are the only member of your LLC, then you will be automatically treated like a sole proprietor. Most multiple member LLCs will be treated like a partnership. If you decide you would like to be taxed in a different manner than these defaults, then you need to file Form 8832 to elect another classification. Note that if you intend to be classified as an S Corporation, you need to complete Form 2553. Once you determine your business structure for tax purposes, just use the recommended forms above to file. To understand more, be sure to check out these instructions from the IRS: IRS Forms for LLCs.

When These Forms are Due

Form 1065 and Form 1040 Schedule C must be filed by April, 15th. Forms 1120, 1120A, and 1120S are due a month earlier, by the March 15th deadline.

The following six tips will help ensure that you do not pay a cent more in self-employment tax than the law requires.

Form an S Corporation

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The self-employment tax applies only to what the IRS calls “earned income.” That is, money paid to you as a salary or wage. It does not, however, apply to dividends (or “unearned income.”) The way to receive business income in the form of dividends is to create an S corporation. Nothing changes except that your clients or customers now pay the corporation instead of you directly. Instead, you begin withdrawing a salary from the corporation – but not a full salary. By paying 60% to yourself in the form of salary and 40% in the form of dividends, you will exempt that 40% from self-employment taxes.

As MyMoneyBlog explains in its comprehensive breakdown of the S corp strategy, “the difference between $90k salary vs. $50k salary/$40k dividends is $6,000 a year” in tax savings!

Subtract Half of Your FICA Taxes From Federal Income Taxes

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Entrepreneurs are also eligible to deduct half of their self-employment taxes from their federally taxable income. Using the above example: let’s say you owe $7,650 in self-employment tax, which is 15.3% of the $50,000 salary your S corporation paid out. You can now, in turn, deduct $3,825 (which is half of $7,650) from your federally taxable income of $50,000. This way, the IRS can only tax $46,175 of your salary instead of the entire $50,000. While it does not reduce your self-employment tax, it reduces the total amount of tax you pay by lowering your taxable income.

Deduct Valid Business Expenses

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The IRS allows business owners and entrepreneurs to deduct all “ordinary and necessary” business expenses. Here, “ordinary and necessary” is the operative phrase. You cannot take a trip to Hawaii and write it off, for instance, unless you genuinely went there to work. You can, however, deduct anything used to generate your income: office space, supplies, advertising costs, business travel, even a pro-rated portion of your mortgage and utilities (if you maintain a home office.) Therefore, if you rack up, say, $10,000 in business-related expenses during the year, you can reduce your taxable income from $50,000 to $40,000. Your self-employment tax obligation will now be 15.3% of $40,000 (which is your net income) rather than $50,000 (which is your gross.)

Deduct Health Insurance Costs

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One substantial tax advantage the self-employed have over employees is the ability to deduct health insurance costs. As About.com explains, you can “deduct the full cost of health insurance you purchase for yourself, your spouse, and/or your dependents” so long as you had a net profit for the year. Like the business expenses above, deducting your applicable health insurance costs reduces your taxable income for that year, thereby reducing the total dollar amount of taxes paid.

Defer Income to Avoid Higher Tax Brackets

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Another creative but perfectly legal way to reduce your self-employment taxes is to defer income. As a self-employed person, you can choose whether to get paid now or later. While it might seem foolish to delay receiving income, consider the following scenario. Let’s say that even after taking every legally permissible deduction, you are still on pace to have received $36,000 in net income during the 2010 tax year. By arranging to be paid even $2,001 of that in January 2011 rather than now, your 2010 income will be taxed only at the 10% and 15% income tax rates. None of it will be taxed at the 25% rate, as would any amount of salary between $34,000-$82,400.

Bargaineering has helpfully published the marginal income tax brackets for 2010 here. Be mindful of them and consider whether it might objectively make sense to defer some of your income. If you don’t need it right away, deferring income is an excellent way to reduce both your income taxes and self-employment taxes.

]]> http://blog.turbotax.intuit.com/2010/06/14/6-ways-to-pay-as-little-self-employment-tax-as-legally-necessary/feed/ 6 joshritchie http://blog.turbotax.intuit.com/2010/03/02/tax-tips-for-the-self-employed/ http://blog.turbotax.intuit.com/2010/03/02/tax-tips-for-the-self-employed/#comments Tue, 02 Mar 2010 22:44:55 +0000 TurboTaxBlogTeam http://blog.turbotax.intuit.com/?p=2297 Full story]]> The first year I included self-employment income on my tax return, the increase in the amount of tax I owed the government surprised me. I had grown accustomed to receiving a refund check every year, but not only did I owe money to the government, I owed more than I expected.

When you work for an employer, you pay half of the Social Security and Medicare taxes owed to the government while your company pays the other half. When you are a sole proprietor, you are both the employer and the employee. The full amount of Social Security and Medicare taxes, 15.3 percent of your income, will come out of your pocket as the self-employment tax.

While this sounds like a disadvantage, a law seemingly designed to discourage people from owning their own business, it is offset by a number of advantages. When you file your taxes as a self-employed individual, keep these in mind in order to reduce your tax bill.

You can reduce income by 7.65 percent before calculating the 15.3 percent you owe for self-employment tax. This calculation is built into Schedule SE, the self-employment tax form.

You can deduct half your self-employment tax from your income. Even if you do not itemize your deductions, you receive this benefit. Half of what you owe for self-employment tax is deducted from the taxable income you report on your 1040. This represents what would be the employer’s portion of your self-employment income.

Focus on your other deductions. A wide variety of deductions are available when you operate your own business. The deduction with the biggest potential for reducing your tax bill is the home office deduction. If part of your home, whether you own a house or rent, is used exclusively for your business, you can claim this deduction. For example, if you use one room out of the eight rooms of your home for business, you can deduct 12.5% of certain expenses. Or, if you use 500 square feet out of a total of 2,500 square feet, you can deduct 20% of those expenses.

The allowed expenses include your rent or mortgage interest, utilities, property taxes, and insurance. Form 8829 covers the home office deduction if you are completing your taxes by hand.

Most of your other expenses related to your business will be deductible, as well. Consider any expenses you’ve paid in these categories — this is where holding onto your receipts and keeping accurate records in Quicken will be helpful.

• Supplies. Any operating supplies you purchased to help you run your business can be deducted from your self-employment income. Some examples include: printer paper and ink; blank CD-ROMs, flash drives, and hard drives for storing your data; and shipping materials and stamps.
• Communication. If you use a land line or a cell phone for your business, your bills are deductible. If the internet connection is necessary for the operation, its cost can be included. I use Skype in order to record interviews which are then published online within my business, so this cost is deductible for me.
• Advertising. The expenses you pay in order to make the public aware of your business through advertising, marketing, and public relations can be deducted from your business income for the purposes of calculating your tax bill. If you paid a designer to develop a logo, these fees are deductible as well. Expenses related to networking, or meeting people in your line of work, apply to this category.
• Business travel. Airfare, hotel charges, and rental car expenses are deductible when they are legitimately connected to travel for business purposes. Other expenses incurred while traveling for business are deductible, including storage, dry cleaning, and meals. Although you won’t need to provide receipts to the IRS for any expenses under $75, make sure you keep complete records including the business purpose of your travel.
• Vehicle expenses. If you drive your car for your business, you can deduct the actual business-related expenses such as fuel or take a deduction based on a per-mile rate set by the IRS each year.
• Asset depreciation. Any business equipment purchases such as your computer and office furniture are included in this category. For example, if you are a photographer your cameras and lenses are subject to a deduction for depreciation.

These are not the only deductions available to the self-employed. Using tax preparation software like TurboTax with thorough questionaires will ensure you will not miss any available deductions.

Caption: DeusXFlorida

Whether you’re trying to make a little extra cash before the school year starts back up, or you’re just bored—summer jobs are a great way to put a little something in your pockets.  But just because the summer is void of tests and studying, doesn’t mean you get a free ride from every angle.  That summer job you have right now will still have to be reported come tax time.  Here are a few tips to help you be sure you’re in line with what the Tax Man expects:

1)  Tips are taxable

A tip is considered income, so you have to report it on your return.  Be sure to keep track of exactly how much you’re given.  You’ll report this on Form 4137, which TurboTax will help you fill out (so don’t worry about having to track the form down).

2)  Odd jobs aren’t exempt

Even if you’re just mowing a few of your neighbors’ lawns, you still have to report the money you receive for that service as income tax.  This type of income is considered self employment income, so be sure to report it correctly (using a Schedule C).   And good news! TurboTax will walk you through this process as well.

3)  If you make $400 or more from your odd job, you have to pay self-employment tax

You may be the entrepreneurial type and turn your lawn mowing gig into something a little more lucrative.  If you make over $400 from this, you’ll need to not only pay income tax on your earnings, but self-employment tax as well (this is what pays for Social Security and Medicare).  This tax will be figured on Form 1040, Schedule SE—surprise, surprise, TurboTax has you covered.

4)  Fill out a W-4 Form

This may be a no brainer, but fill out a W-4 no matter how trivial the job may seem.  If you have a boss, you should have tax withholdings.  Doing so will make sure the right amount of taxes are being taken out of each paycheck so you hopefully won’t have to pay when you file a return.

5)  Newspaper carriers have some unique rules when it comes to taxes

You must meet a few conditions to be considered a direct seller and therefore treated as self employed:

• You are in the business of delivering newspapers

• Your pay is directly related to sales instead of how many hours you worked

• You deliver under a written contract that specifies you are not treated as an employee for federal tax purposes.

6)  Most of the time, newspaper carriers that are under 18 aren’t regulated to self-employment tax

7)  If you’re in ROTC, subsistence allowances from advanced training are not taxable

The caveat to this is that active duty pay (like the pay you received while participating in a summer advanced camp) is taxable like any other income.  You’ll get a W-2 just like with any other job, so be on the lookout at the end of the year.

And there it is!  A few tips to keep in mind while earning a little extra money.  Pretty simple.  Now, one more bonus tip….try to relax a little, the summer is too short as it is.