Jackson Hewitt® is
here to help you understand complex tax laws so you can be better informed and
take full advantage of tax law provisions.
These topics explore some of
the more important aspects of complicated tax laws, in a manner that is
understandable and concise.
Are You Self-Employed
Generally, you are self employed if
- 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 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?
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 current year.
- Up to $500,000 of certain tangible business property may be deducted in the
year it was put in service as a section 179 expense rather than using the
- 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.
- Business 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 rates.
- 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.
- Costs 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 questions.
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 contributions.
also consider the following questions before you begin preparing your tax
- Will you have to pay Social Security and Medicare taxes,
FUTA taxes, and workers' compensation insurance?
- Will you have more
than one trade or business?
- What if your attempt to operate a business
- Should your financial calculations be based on a calendar year
or a fiscal year?
Here are some additional credits and deductions
for small business owners:
- Qualified leasehold property placed in
service before January 1, 2014 is eligible for up to $250,000 of section 179
deduction. This includes improvements to rented business property necessary for
- There is a Small Business Health Care Tax credit for
employers who pay 50% or more of the qualified cost of health insurance.
- The special bonus depreciation rate is 50% (down from 100%) of the
qualified new property purchased and placed in service in the business after
December 31, 2011.
- There is a 2% adjustment for the Social Security
taxes paid with Schedule SE for 2012.
Contact your neighborhood
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