| Have you ever noticed how many small businesses | | | | able to convert your commuting expenses between |
| and entrepreneurs there are? There are millions of | | | | the two locations into business expense. Many |
| Americans who are self-employed and enjoy pursuing | | | | self-employed individuals miss these deductions |
| their dream. Others have a dream of starting and | | | | because they are unaware of them or they do not |
| owning their own business. Through it all the one thing | | | | keep appropriate records to claim the deductions. |
| no one enjoys in owning their own business is the | | | | They are subject to the Social Security |
| paperwork and tax issues that arise from being | | | | self-employment tax (FICA). As a self-employed |
| self-employed. | | | | individual you must pay 15.3% tax on your net earnings |
| If you are not incorporated, and being self-employed | | | | up to $97,500 in 2007 and $102,000 in 2008. All net |
| you are considered a "sole proprietor" or an | | | | earnings (with no limit) above the yearly maximum are |
| "independent contractor" for both legal and tax | | | | subject to a 2.9% Medicare tax. |
| purposes. You will report business sales or revenues | | | | You are allowed a partial deduction of any FICA taxes |
| on your personal tax return. Here are some issues and | | | | paid. You can deduct one-half of your FICA taxes |
| guidelines you should consider as you run and manage | | | | from you gross income. If you pay $8000 in FICA |
| your business. | | | | taxes, for example, you may deduct $4000 from your |
| You will be required, as a self-employed individual, to | | | | gross income. In several studies of tax returns many |
| report you business profits or losses on Schedule C of | | | | miss this deduction and therefore pay more in taxes |
| Form 1040. Your net business income is taxable to you | | | | than required. |
| as an individual. Don't make the mistake made by one | | | | Another tax deduction that has changed in recent |
| misinformed individual who was netting about $10,000 a | | | | years is the deduction of health insurance costs. Now |
| year and "investing" the income in collectibles. Since | | | | you may deduct 100% of your health insurance costs |
| she thought she was not withdrawing any money | | | | as a business expense. |
| from the business she had no tax liability. The IRS | | | | A potentially dangerous problem of being |
| showed her the error of her ways, after an extensive | | | | self-employed is the failure to pay required quarterly |
| audit, by hitting her with a large tax bill which included | | | | estimated tax payments. They are estimates that can |
| interest and penalties. | | | | be adjusted as your tax year progresses. If you fail to |
| From your gross revenues or sales you can deduct | | | | make the required quarterly tax payments and you |
| reasonable business expenses incurred in generating | | | | reach the end of the year without sufficient funds to |
| the business revenue. In the event of expenses | | | | pay your taxes this could develop into a severe |
| exceeding revenue the business loss will generally be | | | | problem. |
| deductible against your total income from other | | | | By planning ahead you can keep this potentially costly |
| sources. There are special rules relating to whether | | | | event from happening. |
| your business is considered a hobby and if you have | | | | If just starting out in business or you've been in |
| anything "at risk." | | | | business a number of years maintaining complete |
| If you are self-employed and you work our of your | | | | records of all your business transactions will allow you |
| home you are entitled to deduct a portion of the cost | | | | to properly manage the business. By documenting |
| of the home based on the portion of the home used in | | | | every expense and by periodically (at least monthly) |
| the business-such as an office or storage of inventory. | | | | tracking individual expenses this will go a long way in |
| Other payments such as utilities can also be prorated. | | | | helping manage the expense side of the business. |
| If you deduct as a housing cost a portion of your | | | | Keep a log of business travel expenses and your |
| property tax, for example, be sure to subtract the | | | | vehicle mileage. Whenever, you have any doubt about |
| amount from the total property tax that you might | | | | keeping a record of an expense, do it. |
| claim if you itemize your deductions. | | | | To properly manage a business you must maintain |
| Working out of your home and if you have an | | | | complete records of all business income and |
| additional work area at another location you may be | | | | expenses. Simply put, document everything. |