If you’re in business for yourself, you know how challenging it can be to run your business and keep on top of your tax situation. Here are some of the tax rules you need to be aware of if you’re a self-employed sole proprietor or are thinking of becoming one.
Income Taxes
As you probably know, sole proprietors do not file a separate federal income-tax return for the business. Instead, they summarize their business income and expenses on Schedule C of their personal income-tax returns.
Be sure to keep complete records of your income and expenses. Deducting all your ordinary and necessary business expenses will help minimize your tax liability. If you have losses, these are generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses, and activities for which you were not “at risk.”
Self-employment (SE) Taxes
Any self-employed person who has net earnings of at least $400 from the business is subject to SE taxes on those earnings. SE taxes generally track the Social Security and Medicare taxes paid by employees and their employers and are partially tax deductible.
Quarterly Estimated Tax Payments
Your net SE income will be taxable whether or not you withdraw cash from your business account. Moreover, you may be subject to penalties if you fail to make appropriate quarterly estimated tax payments.
Home Office Deduction
If you work out of your home, you may be able to deduct a portion of the costs incurred to maintain your home. You also may be able to deduct commuting expenses incurred to travel from your home office to another work location.
Health Insurance Costs for Self-Employed
When tax law requirements are met, you may deduct your health insurance premiums as a trade or business expense, including premiums paid for your spouse, dependents, and children under the age of 27.
Retirement Plan
If you don’t already have a tax-favored retirement plan, you may want to consider establishing one. Contributions to the plan would be tax deductible, within certain tax law limits. Types of retirement plans available to sole proprietors include solo 401(k) and simplified employee pension (SEP) plans.
File Information Returns
You may have to file information returns for wages paid to employees, payments for certain fees, for rents, as well as payments to your contractors.
Hiring Your Children When You Are Self-Employed
You can deduct “reasonable wages” paid to your children for legitimate work performed for your business. As long as your children are under age 18 and your business is unincorporated, you generally won’t have to pay Social Security or Medicare taxes on their pay.
Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.