Tax Tips for New Businesses and Self-Employed Taxpayers

Josephine perfected the art of baking. Her cookies, cakes and pies were always a hit amongst friends and family who persuaded her to take it up professionally. Encouraged by them, Josephine started a bakery specializing in hand-made and hand-crafted products. While her venture was a success, because the result was baked with love, what she was struggling with was understanding her tax dues. 

America is a free country, promoting entrepreneurial growth, even more so with the current tax laws. So, if you start a business, like Josephine, you need to know about your federal tax obligations and opportunities that are available. You may need to know not only about income taxes, but also about payroll taxes.

Here are five basic tax tips that can help get your business off to a good start:

1. Business Structure.

As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company (LLC). You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.

There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number (EIN).

You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online, and it’s free to do so, if you do it yourself. You must apply online, Monday thru Friday and be sure to do so, 8am – 5pm Eastern Time (ET).

4. Accounting Method.

An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it, (regardless of how long it takes for clients to pay you) and deduct expenses in the year that you incur them (regardless of how long it takes for you to pay vendors). This is true, even if you receive the income or pay the expenses in a future year.

5. Employee Health Care.

The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit, if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities since 2017, employers employing at least a certain number of employees (generally 50 full- time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

Tips for Self-Employed Taxpayers

If you are an independent contractor or run your own business, there are a few basic things to know when it comes to your federal tax return.

Here are some tips from the IRS, you should know about income from self-employment:

1. Self-employment income can include income you received for part-time work. This is in addition to income from your regular job.
2. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040.
3. You may have to pay self-employment tax as well as income tax if you made a profit. Self- employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self- Employment Tax, to figure the tax. Make sure to file the schedule with your tax return.

4. You may need to make estimated tax payments. People typically make these payments on income that is not subject to withholding. You may be charged a penalty if you do not pay enough taxes throughout the year.

5. You can deduct expenses you paid to run your trade or business. You can deduct most business expenses in full, but some must be ’capitalized.’ This means you must depreciate (write off) the expense over a period of years.

6. You can deduct business costs only if they are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.

7. You may be able to hire your children to assist you in your occupation and receive a tax business deduction for paying them wages to help you. Also, their wages may not be taxable under certain conditions.

8. You can deduct health insurance premiums (including Medicare) on your personal tax return without itemizing

9. You may be eligible for the Qualified Business Income Deduction of up to 20% of your profits as a business deduction since 2018.

Home Office Deductions

If you work from home, you should learn the rules for how to claim the home office deduction. Today, a simplified option is available to figure the deduction for business use of your home. The new option may save you time because it simplifies how you figure and claim the deduction. It can also make it easier for you to keep records. It does not change the rules for who may claim the deduction.

Here are six tips from the IRS about the home office deduction:

1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. Also, the part of your home used for business must be:

• Your principal place of business, or
• A place where you meet clients or customers in the normal course of business, or
• A separate structure not attached to your home. Examples might include a studio, garage or barn.

2. If you use the actual expense method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid could qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid could qualify. The amount you can deduct usually depends on the percentage of your home used for business.

3. Beginning with 2013 tax returns, you may be able to use the simplified option to claim the home office deduction instead of claiming actual expenses. Under this method, you multiply the allowable square footage of your office by a prescribed rate of $5. The maximum footage allowed is 300 square feet. The deduction limit using this method is $1,500 per year.

4. If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.

5. If you are self-employed and choose the actual expense method, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You claim your deduction on Schedule C, Profit or Loss from Business, if you use either the simplified or actual expense method. See the Schedule C instructions for how to report your deduction.

6. If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business use must also be for your employer’s convenience.

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