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

Complete List of Articles

Forum on India Taxes: http://www.mytaxes.in/

OctroTalk - World's First without 3G Live Video Chat/Conference & Video Streaming for Mobile Phones -- For Nokia S60 3rd., Window Mobile Smartphone and Pocket PC and Windows Desktop. OctroTalk has instant messaging, P2P file transfer, VoIP, SIP calling, live video chat and video conference. Free Trial/Download http://www.octro.com/

List of 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. 2008 Filing Requirement
2. Filing Requirement for a Dependent
3. 2009 Filing Requirements
Your Income (Wages and Self Employed)
1. W2 vs 1099-Misc: Employee vs Independent Contractor
2. Tax Filing by Self Employed Sole Proprietor or Independent
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
1. Traditional IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
Income Exemptions and Deductions
1. Moving Expenses
2. Itemized Deductions
3. Student Loan Interest Deduction
Status of Your Tax Refund
1. When will I get my tax refund?
U.S. Gift tax and Inheritance Tax
1. The U.S. Gift Tax
2. Tax on Inheritances
Sale of Your Home
1. Profit from the Sale of Your Home
2. Foreclosure or Repossession of Main Home
3. First-Time Homebuyer Credit
Sole Propreitor, Partnership & Corporations
1. Self Employed Sole Proprietor or Independent Contractor
2. Partnerships
3. S. Corporations
State Tax Return
1. Working in Two or More States
What's New for 2009
What's New for 2009

Tax for Aliens
1. U.S. Tax Filing Requirements for Non-Residents
2. Substantial Presence Test
3. Social Security and Medicare (FICA) Taxes for Non-resident Exempt Individual
4. U.S. Tax Treaties for Professors, Teachers and Researchers
5. U.S. Tax Treaties for Students and Apprentices
6. Mandatory Reporting of Foreign Bank and Financial Accounts
7. The U.S. Visas

OctroTalk - World's First without 3G Live Video Chat/Conference & Video Streaming for Mobile Phones -- For Nokia S60 3rd., Window Mobile Smartphone and Pocket PC and Windows Desktop. OctroTalk has instant messaging, P2P file transfer, VoIP, SIP calling, live video chat and video conference. Free Trial/Download http://www.octro.com/

For any question on the U.S. ustaxfiling@gmail.com

Forum for India Taxes for Individuals and Business

If you have any question on India income tax for individuals or companies, here is the forum where you can post your question. http://www.mytaxes.in/

We have a team of experts -- CAs and tax professionals to answer your questions. You can post questions about PAN application and enquiry, TDS and Fringe Benefit tax, Individual income tax for male, female and senior citizens, and filing company returns.

Articles/Topics on India Taxes
1. Income Tax Rates Financial Year 2007-2008 (Assessment Year 2008-2009)
2. Home Loan Deduction
3. Rent Income
4. PAN Application and Enquiry
5. Fringe Benefit Tax
6. Current TDS Rates
7. Income Tax Rates for the Accounting Year April 1, 2008 to March 31, 2009

For Those Who Can’t Pay the Tax Due in Full

IRS will charge you interest and penalties if you don’t file your tax return and pay the taxes on time. But taxpayers can limit these charges by filing on time and paying sooner.

The current interest rate charged by IRS is 6 percent per year and late payment penalties, normally 0.5 percent (1/2 of 1 percent) per month, apply to any tax paid after the April 15 deadline, taxpayers can limit these charges by paying sooner. For example, a taxpayer who files on May 1, owing $1,000 in tax, would be charged interest plus a $50 penalty.

If you can not pay the tax due in full on or before the filing date of April 15, 2008, here is what you should do:
1. Make Partial Payment by April 15, 2008
Make sure to pay what ever maximum you can pay before April 15, 2008. If you are also filing your tax return, make sure to include the payment with your tax return. You will also attach Form 1040-V. If you are applying for extension to file, then send the payment with Form 4868.

Various e-pay options offer taxpayers the easiest and fastest way to make a full or partial payment with their return. These options enable taxpayers to make payments either online or by phone using electronic funds withdrawal or a credit card. Alternatively, taxpayers can send the IRS a check made out to “United States Treasury.”

If you are not paying the full amount of tax due, make sure to make a short-time payment agreement with IRS or apply for Installment Agreement.

2. Apply for 6-month’s Automatic Extension to File Your Tax Return (Form 4868)
If your tax return is not complete, make sure to file Form 4868 for 6-months extension to file your tax return. Make sure to pay all your tax due or the amount you are in a position to pay with Form 4868. If you apply for extension, then you can file your tax return up to October 15, 2008. You will not pay penalty for not filing your tax return. However, you will still pay interest on the tax due amount.

3. Make a Short-time Payment Arrangement with IRS
Taxpayers who need more time to pay can find out in just a few minutes whether they qualify for a payment agreement with the IRS. Just click on the Online Payment Agreement link and follow the prompts. By entering some basic information about their tax situation, eligible taxpayers can set up in a matter of minutes either a short-term payment extension or a monthly payment plan.

A short-term extension gives a taxpayer up to 120 days to pay. No fee is charged, but the late-payment penalty plus interest will apply.

4. Apply for Installment Agreement
A monthly payment plan or installment agreement gives a taxpayer more time to pay. Though interest still applies, the late-payment penalty is cut in half for any month an installment agreement is in effect. This reduced rate of 0.25 percent (1/4 of 1 percent) per month is only available if the tax return was filed on time.

A user fee will also be charged if the installment agreement is approved. The fee, normally $105, is reduced to $52, if taxpayers agree to make their monthly payments electronically through electronic funds withdrawal. The fee is $43 for eligible low-and-moderate-income taxpayers.

Alternatively, taxpayers can apply for a payment agreement by filling out Form 9465, Installment Agreement Request. This form can be filed along with either an electronically filed return or a paper return. If filing on paper, be sure to attach it to the front of the return.

Special Treatment for Eligible Taxpayers
Some taxpayers can wait until after April 15 to file and pay. As a general rule, those eligible get the extra time penalty-free and interest-free without having to ask for it. Eligible taxpayers include:

(a) Members of the military serving in Iraq, Afghanistan or other combat-zone localities. Normally, the filing and payment deadline is postponed until 180 days after the service member leaves the combat zone.
(b) Disaster-area taxpayers in four states affected by recent floods, storms and tornadoes. The filing and payment deadline is postponed until May 6 in parts of Illinois, May 19 in parts of Georgia and Missouri and May 27 in parts of Arkansas.

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
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
Income Adjustments -- Retirement Plans
1. Trad IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
What's New for 2009
What's New for 2009

Complete List of Articles

Substantial Presence Test

***
If you are not a U.S. person, you will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year 2011. In this test you can not include the days that are "Exempt" from residency, the days in transit or the days of stay in the U.S. because of medical condition. To meet this test, you must be physically present in the United States on at least:
1. 31 days during 2011, and
2. 183 days during the 3-year period that includes 2011, 2010, and 2009, counting:
(a) All the days you were present in 2011, and
(b) 1/3 of the days you were present in 2010, and
(c) 1/6 of the days you were present in 2009.

First Year of Residency If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.

Residency starting date under substantial presence test. If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year. However, you do not have to count up to 10 days of actual presence in the United States if on those days you establish that:
*You had a closer connection to a foreign country than to the United States, and
*Your tax home was in that foreign country.

In determining whether you can exclude up to 10 days, the following rules apply.
*You can exclude days from more than one period of presence as long as the total days in all periods are not more than 10.
*You cannot exclude any days in a period of consecutive days of presence if all the days in that period cannot be excluded.
*Although you can exclude up to 10 days of presence in determining your residency starting date, you must include those days when determining whether you meet the substantial presence test.

First-Year Choice
If you do not meet either the green card test or the substantial presence test for 2010 or 2011 and you did not choose to be treated as a resident for part of 2010, but you meet the substantial presence test for 2012, you can choose to be treated as a U.S. resident for part of 2011. To make this choice, you must:
*Be present in the United States for at least 31 days in a row in 2011, and
*Be present in the United States for at least 75% of the number of days beginning with the first day of the 31-day period and ending with the last day of 2011. For purposes of this 75% requirement, you can treat up to 5 days of absence from the United States as days of presence in the United States.
Thus if you choose to be treated as resident for part of 2011, you are dual status for 2011. If you do not choose to be treated as resident for part of 2011, you are nonresident for 2011.

If you are married and under First Year Choice you choose to be treated as resident for part of 2011, you have two choices:
1. File dual status tax return, or
2. File joint return as residents even when your spouse is nonresident.
(Note: A U.S. citizen or resident can file joint return as residents even when the spouse is nonresident and has never been to the U.S. On the joint resident return, both spouses must report worldwide income for the year.)

Exempt Individual
The term “exempt individual” does not refer to someone exempt from U.S. tax, but to anyone in the following categories.
(a) An individual temporarily present in the United States as a foreign government-related individual.
(b) A teacher or trainee temporarily present in the United States under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
(c) A student temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.
(d) A professional athlete temporarily in the United States to compete in a charitable sports event.
For all these 4 categories of Exempt Individual, there are different rules for the period you are considered exempt and requirement to remain exempt.

More Articles: Tax for Aliens
1. The U.S. Visas
2. U.S. Tax Filing Requirements for Non-Residents
3. Substantial Presence Test
4. Social Security and Medicare (FICA) Taxes for Non-resident Exempt Individual
5. U.S. Tax Treaties for Professors, Teachers and Researchers
6. U.S. Tax Treaties for Students and Apprentices
7. Mandatory Reporting of Foreign Bank and Financial Accounts
8. The U.S. Visas

More Articles: Complete List of Articles

OctroTalk with VoIP for Windows Phone - Besides instant messeging you can mak Voice Calls to GoogleTalk/Gmail users. This FREE app can be downloaded from the Windows Phone Marketplace at
http://windowsphone.com/s?appid=42f332f9-4d13-42d2-8214-e290bbd54cde


Forum for India Taxes: http://www.mytaxes.in/

U.S. Tax Treaties for Professors, Teachers and Researchers

China, People's Republic of *
An individual who is a resident of the People's Republic of China and who is temporarily in the United States primarily to teach, lecture, or conduct research at a university or other accredited educational institution or scientific research institution is exempt from U.S. income tax on income for the teaching, lecturing, or research for a total of not more than 3 years.
This exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest.

Germany*
A professor or teacher who is a resident of Germany and who is in the United States for not more than 2 years to engage in advanced study or research or teaching at an accredited educational institution or institution engaged in research for the public benefit is exempt from U.S. tax on income received for such study, research, or teaching. If the individual's visit to the United States exceeds 2 years, the exemption is lost for the entire visit unless the competent authorities of Germany and the United States agree otherwise.
The exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest.

India*
An individual is exempt from U.S. tax on income received for teaching or research if he or she:
*Is a resident of India immediately before visiting the United States, and
*Is in the United States to teach or engage in research at an accredited university or other recognized educational institution in the United States for a period not longer than 2 years.
If the individual's visit to the United States exceeds 2 years, the exemption is lost for the entire visit.
This exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest.

Italy*
A professor or teacher who is a resident of Italy on the date of arrival in the United States and who temporarily visits the United States to teach or conduct research at a university, college, school, or other educational institution, or at a medical facility primarily funded from government sources, is exempt from U.S. income tax for up to 2 years on pay from this teaching or research.
This exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest.

United Kingdom*
A professor or teacher who is a resident of the United Kingdom on the date of arrival in the United States and who is in the United States for not longer than 2 years primarily to teach or engage in research at a university, college, or other recognized educational institution is exempt from U.S. income tax on income for the teaching or research. If the individual's 2-year period is exceeded, the exemption is lost for the entire visit, including the 2-year period.
The exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest.

Thailand*
An individual who is a resident of Thailand on the date of arrival in the United States and who is in the United States for not longer than 2 years primarily to teach or engage in research at a university, college, school, or other recognized educational institution is exempt from U.S. income tax on income for the teaching or research. The exemption from tax applies only if the visit does not exceed 2 years from the date the individual first visits the United States for the purpose of engaging in teaching or research.
This exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest. This exemption does not apply if, during the immediately preceding period, the benefits described in treaty Article 22(1), pertaining to students, were claimed.

*This information is from: IRS Publication 901: The Tax Treaties

More Articles on Tax for Aliens
1. The U.S. Visas
2. U.S. Tax Filing Requirements for Non-Residents
3. Substantial Presence Test
4. Social Security and Medicare (FICA) Taxes for Non-resident Exempt Individual
5. U.S. Tax Treaties for Professors, Teachers and Researchers
6. U.S. Tax Treaties for Students and Apprentices

Complete List of Articles

OctroTalk - World's First without 3G Live Video Chat/Conference & Video Streaming for Mobile Phones -- For Nokia S60 3rd., Window Mobile Smartphone and Pocket PC and Windows Desktop. OctroTalk has instant messaging, P2P file transfer, VoIP, SIP calling, live video chat and video conference. Free Trial/Download http://www.octro.com/

Any Question?
If you have a question, send me an email: ustaxfiling@gmail.com
Forum for India Taxes: http:///www.mytaxes.in