Small businesses are the engines of economic growth in America. Being in business for yourself can be very rewarding as well as challenging. It can also be complicated when it comes to figuring your income taxes. For the fact that you are personally responsible for making your own tax payments, you need to know the regulations involved. You must report all income you receive from your business unless it is excluded by law.
According to IRS definition, you are self-employed if you receive payments for products or services you provide and you are not an employee. You can have business income even if you are not involved in the activity on a regular full-time basis. You are a sole proprietor if you own an unincorporated business by yourself. Self-employment goes by many names, such as Independent Contractor, Sole Proprietor, Product Sales Representative, etc.
You will file the sole-proprietorship information at the same time you file your personal return. The Schedule C, Profit or Loss from Business or C-EZ, Net Profit from Business, will determine the net gain or loss of the business. If the loss is attributable to an activity “not engaged in for profit,” the loss is not allowed as a deduction against other income.
In general, businesses with two or more owners are not eligible to use the Schedule C, but would have to file a partnership return unless they qualify for some other type of business return. If you are a member of a partnership that carries on a trade or business, you are classified as self-employed.
A married couple who jointly operate an unincorporated business and who file a joint return can elect not to be treated as a partnership for tax purposes. The husband and wife can be the only members of the qualified joint venture and both must materially participate in the business.
When the Schedule C or C-EZ shows a net profit of at least $400, Schedule SE, Self-Employment Tax, should be filed. Depending on your type of business and where you conduct business, there may be other forms you will need. You may also need to make quarterly estimated payments by filing Form 1040-ES, Estimated Tax for Individuals.
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BUSINESS INCOME INCLUDES:
• money paid to you for sales of products or for services you provide
• services or goods provided to you as payment
• income reported on Form 1099-Misc, box 7, as non-employee compensation
• any other income received in the course of business
It is important to keep separate and accurate records for any business-related income or expenses. With records, you can take deductions or credits for expenses related to your business income.
If you own more than one business, you must file a separate Schedule C for each business.
You can deduct the cost of running your business. To be deductible, a business expense must be ordinary and necessary.
An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your trade or business.
If you use your car or truck in your business, you may be able to deduct the cost of operating your vehicle or you can take the standard mileage rate. You must keep written records of the miles driven for business.
If property you acquire for use in your business is expected to last more than one year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You will deduct, through depreciation, some of the cost over a specific period of time on each year's return. If you do not take the depreciation, when you sell the property you must reduce your basis as if you had taken the allowed depreciation.
Some business purchases that qualify may be deducted in the year placed in service instead of depreciated.
Business start-up costs must be amortized rather than depreciated. Costs that you have in setting up a business, franchise fees and goodwill, are examples of expenses that must be amortized.
BUSINESS USE OF YOUR HOME
If you use part of your home as your office, you may be able to deduct some expenses. However, that part of your home must be used regularly and exclusively:
1. as the principal place of business for your trade or business
2. as the place where you meet and deal with your clients in the normal course of your trade or business, or
3. you can use a separate structure on your property which is not attached to your home, if it is used in connection with your trade or business.
Self-employment tax is the Social Security and Medicare amount due on your net earnings which is separate from any income tax due on your income. For 2014 this totals 15.3% of the net earning and is equal to an employee's amount withheld plus the employer's matching amount. The maximum net earnings subject to the Social Security part of self-employment tax for 2014 is $117,000.
SELF-EMPLOYED HEALTH INSURANCE
Your self-employed health insurance premiums for medical and qualified long-term care is 100% deductible if paid to a plan established under your business and your business profit equaled or exceeded the insurance amount.