Wednesday, April 23, 2008

Tax Filing by Self Employed Sole Proprietor or Independent Contractor

If you are an employee, then your employer will issue you Form W-2, which will show your total income from the year and various taxes withheld from your paycheck. If you are an independent contractor or a self-employed person, you must figure about your net income from self employment and must take care of paying the estimated taxes. A self employed person can be a one-owner business, a babysitter, a gardener, a painter, a person with Google Adsense income, a person who sells at e-Bay, a professional consultant or any one who earns income by providing personal services but is not a regular employee.

Schedule C or C-EZ (Form 1040)
If you are a sole proprietor of a business or an independent contractor (one-owner business), and have business related expenses, then you must file schedule C or C-EZ (Form 1040). Schedule C or C-EZ is filed as an attachment to their Form 1040 individual income tax return. Self-employed individuals with business expenses of less than $5,000, no net losses and no employees may be able to file Schedule C-EZ, Net Profit for Business.

On your net income on schedule C or C-EZ, you will pay SE taxes at 15.3% (12.4% social security tax plus 2.9% Medicare tax). Social Security tax is applicable on earnings up to $106,800 in 2009. For for this you will complete schedule SE (Form 1040). If you are an exempt individual, for example nonresidents on F1 and J1, your do not pay SE tax and need not do schedule SE.

Business Expenses
You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold. To be deductible, a business expense must be both 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 business. An expense does not have to be indispensable to be considered necessary.

Capital Expenses. Capital expenses, your normally depreciate. You can deduct capital expenses under section 179 deduction. For 2008 and 2009 the maximum section 179 expense deduction is $250,000 (it was $125,000 for 2007). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $800,000. Section 179 is not allowed for purchases related to rental property.

Start-up Costs. The start-up costs of going into business is amortized. Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. You can elect to currently deduct up to $5,000 of business start-up costs paid or incurred during the tax year. For start-up costs paid or incurred after October 22, 2004, the amortization period is 180 months. The period starts with the month your active trade or business begins.

Car mileage deduction. For your business mileage, you can use standard mileage rate of 55c per mile for 2009 (50.5c per mile form January 1 to June 30, 2008 and 58.5c per mile from July 1 to December 31, 2008) or you can use actual costs (for gas, oil, repairs, maintenance, insurance, etc.) based on business mileage and personal use mileage. You can not deduct commuting miles or miles for personal use.

Home Office deduction. You can deduct expenses for business use of your home only if you have an exclusive part of home for business use and you use it regularly. Also the business part of your home must be one of the following:
*Your principal place of business,
*A place where you meet or deal with patients, clients, or customers in the normal course of your business, or
*A separate structure (not attached to your home) you use in connection with your business.

To take rent deduction, you must figure out the percentage use of your home for your office. Also you can deduct a percentage use of the Internet expenses, water and electricity expenses for home office.

Bank Account. It is always better to have a separate account (and even credit card) for your business. So you keep your personal and business expenses separate. Then if you ever buy or pay a business expense by your personal check then when you get time write a business check to yourself or transfer money from business account to personal account.

Further Reading. 1. IRS Publication 535, Business Expenses
2. IRS Publication 587, Business Use of Your Home

Filing Requirement
A self employed person must file the tax return if the self employed income is $400 or more.

Making Estimated Taxes Payments
You may be required to make estimated tax payments. The due dates are April 15, June 15, September 15 and Jan 15 (of next year). You must pay estimated tax for 2010 if both of the following apply.
1. You expect to owe at least $1,000 in tax for 2010 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:
*90% of the tax to be shown on your 2010 tax return, or
*100% of the tax shown on your 2009 tax return. (110% if your AGI is more than $150,000 or $75,000 for married filing separately). Your 2009 tax return must cover all 12 months.

Most of the self employed people, the easiest option is to make quarterly payments equal to one fourth of the tax for the previous year. For making estimated tax payments for the year 2010, divide your total tax for 2009 (or it may be 110% of your tax for 2009) by four and send the quarterly payments of the estimated tax using Form 1040-ES. If you use a tax software for your 2009 return, the software will automatically generate estimated tax payment vouchers with the amount filled in.

More Articles
Your Filing Status
1. Filing Status for Married
2. Filing Status: Head of Household
Exemptions for Dependents
1. Requirements for claiming a dependent
2. Child of separated or divorced parents
Filing Requirements
1. Filing Requirement for a Dependent
2. 2009 Filing Requirements
Your Income
1. W2 vs 1099-Misc: Employee vs Independent Contractor
2. Tax Filing by Self Employed Sole Proprietor or Independent Contractor
3. Filing W4 Employee’s Withholding Allowance Certificate
Your Foreign Income
1. U.S. Citizen or Resident with Foreign Income
2. Foreign Bank and Financial Accounts
Income Adjustment and deductions
1. Traditional IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
2. Moving Expenses
3. Itemized deductions
4. Student Loan Interest Deductions
What's New for 2009
What's New for 2009

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1 comment:

Anonymous said...

If I'm an independent contractor, And I have to commute to work on site, I was told I could count that mileage for commute. The accountant told me its because I'm an independent contractor that this is true. Is he correct?