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Archive for March 2010

Starting a business? Sole proprietorship tax info

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If you are starting a business of your own, congratulations and best wishes! Here are some things you probably want to know, from a tax perspective.

If you simply open the doors and start selling your product or service, the IRS considers you a self-employed sole proprietor. This is also the case if you are an independent contractor who receives Form 1099-MISC with Nonemployee Compensation reported in box 7.

As a sole proprietor, you file Schedule C with your 1040. You report your business income and expenses on Schedule C. Several things to note here:

If you have a Web site, you normally deduct the costs associated with the Web site on line 8, Advertising.

If you pay independent contractors for services related to your business, you deduct those payments on line 11. If you have employees, you deduct their salaries and wages on line 26. Note that you cannot deduct any payments that you make to yourself – you cannot treat yourself as an employee of your own sole proprietorship.

You can choose to deduct either the actual costs of operating a vehicle that you own or lease on line 9, or take the standard mileage rate (55 cents per mile in 2009). Regardless of which method you choose, you must keep written records showing the business use percentage of a personal vehicle, and you can deduct only the portion of your costs based on the percentage of business use.

Depreciation (line 13) can be complicated. Generally, you depreciate any item of equipment that you expect to use in the business for longer than 1 year (based on the percentage of business use). You can elect to expense items under section 179 rather than depreciate, but be aware that if the business use percentage of those items drops below 50%, or if you dispose of the item before the end of the depreciation period, you will have to take the difference between the amount you expensed and the amount that you would have deducted had you depreciated the item, and declare it as income. Thus, use section 179 expensing carefully. I normally suggest that big-ticket items be depreciated rather than expensed; you don’t usually need that much of a deduction when establishing the business and it can really bite you hard if you wind up going out of business before you reach the end of the depreciation period.

On line 17, deduct any fees you pay to attorneys and CPAs, and the portion of your tax preparation fees that are related to the business portion of your return.

On lines 24a and 24b, you deduct travel expenses and expenses for meals and entertainment. You cannot normally deduct meal expenses unless (a) you are traveling and required to stop for substantial sleep or rest in order to perform your duties, or (b) the meal has a business-related purpose, which usually means that it takes place in a clear business setting and is for your business, or that you conducted substantial business during the meal.

If your net earnings from your business, after expenses, exceed $433, you must also file Schedule SE and pay self-employment tax, which is your share of the Social Security and Medicare tax that you normally have withheld on a W-2, plus the share of those taxes that is paid by your employer when you receive wages. SE tax amounts to 15.3% of your net earnings, multiplied by 92.35%. You deduct half of the SE tax on line 27 of your Form 1040.

These rules hold even if you create a Limited Liability Corporation (LLC), if you are the sole member of the LLC; the IRS disregards the LLC and treates you as a sole proprietor under those circumstances.


Written by nctaxpro

March 24, 2010 at 11:41 am

Posted in Small Business, Taxes

Nannies: Independent Contractor or Employee?

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I see about three or four of these every year – a nanny comes into the office with a Form 1099 showing nonemployee compensation from the individual(s) to whom she provides child care services. When I ask a few basic questions, it becomes clear that I’m dealing with what should be an employer-employee relationship. In just about every case, the family decides when the nanny works, and where she works, and the nanny is not providing her services to the general public. Under those circumstances, the nanny is an employee of the family and the employer should be withholding federal, state, Social Security, and Medicare taxes and issuing the nanny a W-2 (not to mention paying federal unemployment taxes plus other things that the state may require).

If you are in this situation, where you believe that you were wrongly treated as an independent contractor, you have the option of filing Form SS-8, which asks the IRS to determine your status for the purposes of federal employment taxes and income tax withholding. The IRS will send you a letter acknowledging that they have received your SS-8 and will typically send a blank SS-8 to your employer in response – so realize that you won’t be able to do this without your employer finding out, with all the attendant risk that entails.

Once you’ve filed Form SS-8, you also can file Form 8919 with your return, which allows you to report your share of the uncollected Medicare and social security tax that should have been collected by your employer. Until you’ve actually received a determination from the IRS that you are an employee, you will probably use reason code G (no reply received to SS-8) as your reason for filing on the 8919. When you use the 8919, you get credit for your contribution to SS and Medicare (which you also report on line 57 of your 1040) but avoid paying the employer’s share that you pay by filing Schedule C and SE. You also include the income from your employment on line 7 of your 1040 as wage income rather than filing a Schedule C. Realize when you opt for Form 8919 that if the IRS, after reviewing your SS-8 and your employer’s response, determines that you are really an independent contractor, you may be billed for the taxes that you should have paid as an independent contactor plus penalities and interest.

Going the SS-8/8919 route is risky business, and you should consult with both an experienced labor professional and an experienced tax professional first.

Written by nctaxpro

March 13, 2010 at 4:39 pm

Posted in Federal, Taxes