Are You Self-Employed
Generally, you are self employed if you:
- Operate as an independent contractor
- Are the sole proprietor
of a business or you practice a trade
- In some way or another are in
business for yourself
Things to know if you are
- If you and your spouse operate a business together
and file a joint return, both of you may be able to be treated as sole
proprietors instead of as a partnership. Each spouse would report their share
of income and expenses as a self-employed individual on the appropriate form
(for example, Schedule C or Schedule F).
- Up to 100% of medical
insurance costs you pay for yourself, your spouse, and your dependents may be
deductible as an adjustment to income on Form 1040, U.S. Individual Income Tax
Return. The deduction is subtracted directly from your total income and
applies whether or not you itemize. If you purchase your health insurance through the Marketplace, you may have to adjust your deduction for your Premium Tax Credit you receive.
- If you use your vehicle for
business purposes, you may be able to deduct expenses associated with such
use. You may choose the actual expense method or use the standard mileage rate.
If you choose the actual expense method, you must also keep track of your
vehicle-related expenses for the year. Vehicle related expenses include gas,
oil, insurance, repairs, cleaning, registration, etc. The business portion of
your personal property taxes and vehicle loan interest is also deductible.
Whichever method you choose, you must keep track of the mileage on your car
from the first day of the year or the first day you use your car for business
through the end of the year.
You may be entitled to a tax break
if you are operating a business from your home. The following questions will
help you determine whether you can deduct the business use of your home:
- Is this part of your home used regularly and exclusively in conjunction
with your business or work?
- Is this your primary place of
- Is this where customers and clients meet with you?
- Is this where you store product samples?
- Is this where you
administer or manage your trade or business?
- If you answered yes to
any of these questions, you may be able to deduct certain depreciation and
operating expenses for the business use of your home. The same might apply if
you use a separate structure, such as a shed.
- You may recover your
investment in certain business-related properties (such as equipment, a
vehicle, or a building) through the use of depreciation. In this manner, you
deduct some of your cost on each year's return. If you do not claim the
depreciation, and later sell the property, the IRS calculates the basis as
though you had taken the deduction each year. If you have unclaimed or have
underclaimed depreciation deductions on property placed in service in prior
years, you may be able to fully recover all allowable depreciation in the
- Certain types of business property may
be deducted in full the year they are place in service as a section 179 expense rather
than deducting a portion each year under the depreciation method of deduction. Up to $500,000 of certain tangible business property may be deducted in the year it was placed in service as a section 179 expense deduction rather than using depreciation.
- Your employees' wages and
salaries are deductible if they are paid during the tax year for work directly
related to your business and the pay is reasonable. You must be able to verify
that the payments were made for duties actually performed. There are various
types of withholding for different types of employees. Specific forms must be
used for reporting payments made to employees.
- You may be able to
deduct expenses for a leased asset (such as a car or computer) used in your
business. If it is not used solely for business purposes, you may deduct only
the percentage of use that applies to your business or work.
tax credits can reduce your tax liability. There is a credit for providing
access to the disabled and a work opportunity credit for providing work for
members of groups with special employment needs or higher unemployment
- If you are a freelancer writer, photographer, etc., you may
qualify to use Schedule C, Profit or Loss from Business, as a self-employed
individual and report your deductible business expenses on that form. If you
were an employee you would add these expenses to other miscellaneous deductions
on Schedule A and you would be limited to only the remaining expenses after
subtracting 2% of your adjusted gross income from the total.
that you have when setting up an active trade or business, investigating the
possibility of creating or acquiring a business, and some legal fees are
business start-up costs. You can choose to deduct up to $5,000 of business
start-up costs with the remainder amortized over 15 years. Franchise fees,
goodwill, and customer-based intangibles are also amortizable.
- If you
use an accrual-basis method of accounting and you have been unable to collect
money owed to your trade or business, you may be able to deduct that debt. You
must have previously included the money owed as income so that you have a basis
in the debt. A cash-basis taxpayer normally does not report income until they
receive payment so they cannot deduct a bad debt.
- The tax
implications of a self-employed individual are different from those of an
ordinary wage earner. Each situation may present a number of complex tax
- Certain individuals who are covered by a high deductible
health insurance plan may be able to contribute to a health savings account
(HSA). An HSA is a tax-exempt trust or custodial account that you set up with
a U.S. financial institution (such as a bank or an insurance company) in which
you save money exclusively for future medical expenses. The distributions from
HSAs are tax free if they are used for qualified medical expenses.
Contributions are deducted from your gross income when calculating adjusted
gross income, which means you do not need to itemize deductions to claim your
You should also consider the following questions
before you begin preparing your tax return:
- Will you have to pay
Social Security and Medicare taxes, FUTA taxes, and workers' compensation
- Will you have more than one trade or business?
- What if your attempt to operate a business fails?
- Should your
financial calculations be based on a calendar year or a fiscal year?
Here are some additional credits and deductions for small business
- Qualified leasehold property placed in service during the year is eligible for up to $250,000 in a section 179 deduction. This includes improvements to rented business property necessary for your business.
- There is a special bonus depreciation rate of 50% of the basis of qualified property placed in service during the year. The remaining 50% should be depreciated using the regular class-life for the asset.
- There is an additional Medicare tax of .9 percent for self-employed taxpayers who have a total earned income of more than $200,000 ($250,000 fi married filing jointly or $125,000 if married filing separately).
- All professional fees you pay, such as legal fees, accounting fees, tax preparation, even banking fees can be deducted from your income.
Contact your neighborhood
Jackson Hewitt office for more information or assistance. Use the Office
Locator feature available on this Web site or call 1-800-234-1040 to find the
Jackson Hewitt location most convenient for you.