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SELF-EMPLOYMENT
Tax
strategies for the self-employed
Self-Employed
Being self-employed can bring individuals great rewards
and freedoms, yet it also brings great responsibility to
ensure you comply with the rules and requirements of the
IRS. On this page we discuss your income, allowable
deductions and the tax regulations governing self-employed
taxpayers.
Are
You Self-Employed?
You are considered self-employed and subject to
self-employment tax laws if you:
 | carry on your own trade or
business |
| have a profit motivation for your
business activity |
| operate your business in a regular
manner |
| are a sole proprietor |
| are an independent contractor
|
| work full or part-time in the
business endeavor |
| have a net profit of $400.00 or
more |
| have a net profit of $100.00 or
more as an employee of a church electing exemption from
Social Security Withholdings |
Self-Employment Tax
All self-employed must pay a self-employment tax in
addition to income tax. The tax is 15.3% of net earnings and
is comprised of two components— a 12.4% old age, survivors
and disability insurance (OASDI) tax and a 2.9% component
for hospital insurance (Medicare). The 12.4% OASDI portion
is paid on net income (revenues less expenses) up to a set
amount similar to social security. The 2.9% Medicare tax is
paid on all net income. If you receive any wage income on
which Social Security or Railroad Retirement taxes were paid
then the self-employment tax income maximum is reduced by
the amount of wages received. If self-employment income is
below $400 no self-employment tax is due.
What
is Self-Employment Income?
| Income received from a trade or
business you conduct on a continuous and regular basis
less allowable deductions |
| Payments received from your
partnership for services rendered |
| Income paid by insurance companies
to retired insurance agents based on prior work such as
unpaid commissions |
| Real estate rental income if
substantial services are rendered |
| Extended earnings payments to an
independent insurance agent |
| Minister's housing allowances
unless Form 4361 is filed to opt out of Social Security
(not subject to income tax) |
| Income of employees of a church or
church-controlled organization |
| Income from independent
contracting of services |
| Income from street hustling,
panhandling, and drug dealing |
| Income from commercial fishing if
working for share of the catch |
| Foreign earned income excluded
from income tax |
| Income from selling and
distributing newspapers and magazines |
| Business interruption insurance
payments |
| Crop-sharing income |
What’s Not Self-Employment Income?
| Income received as an employee of
another company |
| Income paid to your child if under
18 and your business is a sole proprietorship or
partnership |
| Dividends and interest |
| Gain or loss from sale or exchange
of capital assets or disposition of property not
included as inventory or held for sale |
| Incentive pay to sales people in a
dealership (auto dealer) but paid by the manufacturer
|
| Earnings and dividends of an S
Corporation provided shareholders take a reasonable
salary |
| Income for services not performed
on a continuous or regular basis (this is deemed a
hobby) |
Self-Employment Tax Traps
Each year the Treasury Department (IRS) publishes
statistics on the types of returns that get audited and
those returns with self-employment income are always at the
top of the list.
| Always keep self-employment
activity and records separate from other expenses. Keep
a separate checking and savings account for your
self-employment activities. The IRS is very quick to
deem expenses as personal (non-deductible) expenses if
your bank account co-mingles expenses. |
| Do not confuse hobby and rental
income activity as self-employment activity. The tax
code applies separate laws to these two activities. If
in doubt....ask. |
| Remember the IRS treats all
profits as if they are wages subject to Social Security
and Medicare taxes (self-employment taxes). This is true
whether you wish to distribute or retain your profits.
Consider using alternative corporate structures if you
want to avoid some of this tax. |
Deductions
If you are self-employed, one of your biggest tax
advantages is that you can deduct your business expenses
directly against your income- regardless of whether you
itemize your deductions. You are not subject to the 2% of
adjusted gross income threshold that applies to an
employee’s out-of-pocket business related expenses. As a
self-employed individual, your business expenses reduce the
amount of your income that is subject to the self-employment
tax (FICA) while the un-reimbursed business expenses of an
employee do nothing to reduce their FICA tax.
Se Health Insurance for the Self-Employed
Another major tax deduction provided by the IRS to the
self-employed is the ability to deduct a large portion of
your medical insurance costs. Under certain circumstances,
if you hire your spouse as a bona fide employee and provide
health insurance, 100% of the cost of the insurance may be
deductible. Similarly, a written self-insured medical
reimbursement plan may be a100% deductible expense and
enable you to provide tax free reimbursement of uninsured
medical costs to employees for things like co-payments,
prescriptions, vision and dental care.
Call
Accounting Connections, LLC
770-846-7799
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