Tax Guide For Self Employed
If you’re self-employed, you will be responsible for self-employment tax.
If you are a self-employed individual, you will have a Schedule C to attach to your Form 1040, and self-employment tax is computed on Form 1040, Schedule SE.
Individuals must pay self-employment tax is they have net earnings of $400 or more and there are several sources of net earnings that are used when figuring your self-employment tax liability.
In most cases, net earnings include net profit from a farm or nonfarm business; if you operate more than one business, your net earnings from self-employment are the combined net earnings from all your businesses. The upside to operating more than one business: If you have a loss in one business, it reduces the income from another. Self-employment tax is the self-employed individual’s contribution to social security and Medicare taxes; the old-age taxes of employment. The only difference between the employee and the self-employed is the employee’s social security and Medicare taxes are paid half by the employee and half by the employer, when an individual is self-employed; he/she is responsible for the entire amount.
There are alternative methods that can be used for figuring liability of self-employment tax and they are: The Farm Optional Method and the Nonfarm Optional Method. These methods may qualify an individual to claim a larger Earned Income Credit or Child Tax Credit; they may also, however, increase your self-employment tax liability.
When must self-employment taxes be paid? Generally, the self-employment taxes aren’t due until the end of the year, when your personal tax return is filed. Why is it this way? The self-employment tax isn’t due until the end of the year simply because of the fact that many self-employed business owners don’t file the net profit or net loss figures on their self-employment earnings, until the year’s end. If there is a net loss, the self-employed individual receives a credit of self-employment tax due, in the amount of one-half of the amount due.
The self-employment tax is the self-employed individual’s equivalent to the social security and Medicare tax deducted from employee’s pay check each week. The wage earner’s taxes are configured by their employer and are deducted on a weekly basis. The self-employed individual isn’t required to make weekly payments of self-employment tax, but they are held liable for the full 15.3 rate, that is split between the employee and the employer in wage earning situations. In general, however, if you expect to owe taxes in excess of $1000 for the year, you are required to pay estimated taxes each quarter.
In summary, if you are self-employed, have net earnings of $400 or more, and file a tax return, you will be subject to self-employment tax. To learn more about individual liabilities, exemptions, and alternative tax methods, please visit the online site for IRS Forms and Publications at the IRS website. Topic 554, Publication 517 and 533 will provide more detailed and situation specific information.
Non-profit organizations
Non-profit is a charity on profit is another way of saying not for profit but is sometimes used to describe a for profit that is having losses. Non for profit insurers (mutuelles) try to differentiate themselves from private insurers on the basis of the so-called “fraternal” (the French word is “solitaire”, aimed at indicating that […]
Take Profit - Define Your Payment Rules
In these days of instant payment you would believe that the problem of unpaid registration fees is a negligible issue. Unfortunately the days of instant payment do not coincide with the days of red-tape-free purchase ledger accounting. Companies have their own internal profit rules about raising requisitions for payment and some may take in excess […]
American Recovery and Reinvestment Act of 2009 Highlights
The House and Senate have reached an agreement on the American Recovery and Reinvestment Act of 2009, better known everywhere as “that huge stimulus bill“. I couldn’t stop myself from taking a peek. Here are some details that directly affect most taxpayers:
“Making Work Pay” Tax Credit: $400 per person, $800 per family
Apparently it won’t be sent out as a lum-sum check this time, but will directly increase your paycheck as an extra $13 a week in take-home pay starting in June (since it is retroactive to 2009), falling to about $8 a week in January 2010. I tend to think a lump-sum would have more “bang”. Starts to phase out at $75,000 modified adjusted gross income for single filers, $150,000 for married filing jointly.
“Not Working” Tax Credit: $250 per person
For retirees, disabled individuals and others who don’t work, they will receive a one-time $250 payment. This will probably be a check in the mail.
$8,000 First-Time Homebuyer Tax Credit
Although there was talk of a $15,000 tax credit for all homebuyers, it looks like it was greatly reduced and still restricted to first-time homebuyers. Starts to phase out at $75,000 modified adjusted gross income for single filers, $150,000 for married filing jointly.
If you bought your house between April 9, 2008 and December 31st, 2008, the first-time homebuyer tax credit remains at $7,500 and you will have to pay it back over 15 years, or when you sell the house. If you bought your house after January 1st, 2009 and before December 1st, 2009, the credit is now increased to $8,000 and you will not have to pay it back as long as your live in it for 3 years.
New Car Tax Deductions
If you buy a new car, you can deduct the interest you pay on your loan as well as the taxes you paid on it (on up to $49,500). Starts to phase out at $125,000 modified adjusted gross income for single filers, $250,000 for married filing jointly.
…and a whole lot more, including expanded unemployment benefits. An example of a tiny tidbit that got mixed in? In 2009 and 2010, you can now use your 529 plan money to pay for “computers and computer technology”, which could include peripherals, software, and even broadband internet fees.
S-Corporations vs. LLC: Income Tax Savings Benefits
I am the President and CEO of a uni-national corporation. A one-person S-corporation, to be exact. I chose this over an LLC for a variety of reasons (most of which I don’t remember anymore), but one of them was - what else? - to save some money. I wrote a relatively wordy post a few years back on Forming An S-Corporation To Reduce Self-Employment Taxes. But I just read this e-mail from MyCorporation* that has a concise example with a nifty graphic thrown in:
In an S-Corporation, only earnings paid to an owner as salary is subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to self-employment tax.
Maria is a sole proprietor bringing in sales of $90,000. After she pays her costs & expenses, her profit is $60,000. As a sole proprietor, she is required to pay self- employment tax of 15.3% on this entire $60K of profit, which equates to $9,180.
Now, let’s assume Maria formed an S-Corporation for her business, and chooses to pay herself $35K for the year in salary, and take the remaining $25K of profit through a distribution. She still earns the same $60K in profit. But, let’s look at the tax situation. Because corporations only pay Social Security & Medicare taxes on salaries, she’s only liable for $5,355, saving over $3,800 in taxes!
If you have a single-person LLC, the tax situation is usually very similar to that of a sole-proprietorship. (I should add that in some states you can also choose to have the LLC taxed as an S-Corporation. I would consult a local attorney for more details on this.) Now, the salary has to be “reasonable” based on the compensation of similar work elsewhere, so don’t get too crazy with this.
The catch? As an employer, the S-Corporation has to pay unemployment taxes. The exact rate varies from state to state, but the federal minimum is about $450 per year if your annual income is at least $7,000. However, as both the employer and employee, it is very difficult for me to actually “lay myself off” and claim unemployment benefits. So this fact cuts slightly into potential tax savings.
* I actually used LegalZoom to file my incorporation papers, but right now their competitor MyCorporation is still offering free LLC or corporation filing with promo code MYFREE (same thing costs $139 at LegalZoom). You still have to pay the registration fees charged by your state.
Measuring Prosperity: What Is Social Capital?
There are many forms of capital. Besides the usual definition of business capital (money), there is physical capital (a car, house, or other useful tool), human capital (your skills and education), and also social capital. According to Wikipedia, this describes the value held within our relationships with other individuals and larger social networks.
One of the books I am currently reading is Simple Prosperity by David Wann (co-author of Affluenza). Inside, there is a nice quote about social capital:
It is inevitable that our society will once again give higher priority to belonging and lower priority to belongings.
Look at the results of a study by the National Science Foundation, which found that one-fourth of all Americans say that they have no one that they can discuss personal problems with. Not one person. This number has doubled since 1985. One in 32 people is either in prison or on parole. If our ultimate goal is to be happy and fulfilled, then this can’t be a good trend.
Sociologist Robert Putnam believes the following are indicators of social capital:
- How many of your neighbor’s first names do you know?
- How often do you attend parades or festivals?
- Do you volunteer at your kid’s school? Or help out senior citizens?
- Do you trust your local police?
- Do you know who your U.S. senators are?
- Do you attend religious services? Or go to the theater?
- Do you sign petitions? Or attend neighborhood meetings?
- Do you think the people running your community care about you?
- Can you make a difference?
- How often do you visit with friends or family?
It has been argued that growing social capital can keep you healthy, make schools more productive, reduce crime, and even raise home prices in a neighborhood. Perhaps the best thing about social capital is that “the more you spend, the more you have”.
Yen, Dollar may Lose Safe Haven Status
In accordance with yesterday's post, it appears that this February is set to continue the trend of low volatility observed in previous years. With the US government on the verge of passing a record economic stimulus package, investors are becoming increasingly confident about the prospects of the global economy to avoid recession. On the surface, it would seem that the stimulus should benefit the economy, and by extension the Dollar. However, this ignores the fact that the Dollar is currently being driven by fear- the idea that the US remains a safe haven for investing- rather than by economic fundamentals. The same holds true for the Japanese Yen. Accordingly, regardless of how the stimulus ultimately impacts the economy, it will certainly increase risk tolerance in capital markets, potentially leading investors to shift capital out of the US and Japan into higher-yielding sectors. Bloomberg News reports:
"A lot of money that sat on the sideline is now being put back to work," said [one analyst]. "People are starting to move to make risky bets."
Read More: Yen, Dollar Fall as U.S. Stimulus Prospects Reduce Haven Demand
