Upload
myles-manning
View
216
Download
0
Tags:
Embed Size (px)
Citation preview
Self-Employment Taxes and You.
Aaron Standridge
@aaronstandridge
A new lawsuit is filed in theUnited States every two seconds.
Please don’t take someone else’s turn by suing me.
I am not a lawyer, tax attorney, or IRS Enrolled Agent.
I am just a dude with some free advice.
Always consult a licensed tax professional if you feel that you need to speak with a licensed tax professional.
Taxes
How do they work?
Put a picture of a Juggalo here if you have time.
(I didn’t.)
Being a business is good!
EIN = Employer Identification Number
(protects your SSN!)
EINs are always free, and you can get your first one online!
A formal business agreement can:
Mitigate or prevent disputes between partners
Establish clear expectations regarding ownership
Guard against unforeseen contingencies
Protect your personal assets in the event of legal action against you
Deductions for everyone!
Sole Proprietorship
Accounts for 90% of small businesses
Super easy to create
Minimal inherent cost
All profit, loss, and assets belong to you, the business owner
No separate legal standing
Don’t need a business name or to file any formation papers
Unless you want to accept payments to a business name
Then you must file a DBA at the County Clerk
You can use an EIN with or without a business name
Partnership
Two or more people doing business informally or formally
Requires an EIN (to file the Partnership tax return)
Files an informational tax return, does not pay taxes
Has no separate legal standing
So provides no liability protection
Does not require a formal agreement between members
But it’s a good idea anyway
Distributes profit or loss among partners
Corporations
A C Corporation has its own profits and losses and must pay taxes
An S Corporation passes profit/loss to its shareholders and pays nothing
Must be specifically and formally created by filing papers with the state
Can hold assets, own property, and exists as a separate legal entity
Provides liability protection for shareholders’ personal assets
May not have a non-US-resident as a shareholder
Limited control over distribution of profits
Required to pay a “Reasonable Salary” to its officers
S Corp distributes remainder as dividends to shareholders (at a lower tax rate than income!)
Limited Liability Company (LLC)
Must be specifically and formally created via filing
Files an informational tax return only, does not pay taxes
Offers substantial liability protection for shareholders
Pass profits and losses through to members
May have any number of members, from 1 to everyone
May incur additional taxes or fees from their state government
Protected from their members’ liability as well
Corporate shares can be taken in a lawsuit judgment, LLC membership can not
Business Structure Tax Forms
Sole Prop - Schedule C on the owner’s tax return
Partnership - files its own informational return (Form 1065)
Issues Schedule K-1 to partners, who claim it on their 1040 via Schedule E
S Corp – Files informational tax return (1120S)
Must pay some profit as “reasonable salary” to functioning officers
Issues remaining profit/loss via Schedules K-1 and E, like a partnership
LLC – One member? Sole prop. 2+ members? Partnership.
HOBBY!
Oh no! (dramatic music in your head)
The IRS may classify your business as a hobby for either of the following:
Failing to show a profit for at least 3 of the last 5 years
Running the business in a manner that generally suggests you dislike money
Hobbies have very few inherent tax deductions
The hobby designation can be made retroactively for prior tax years
Oh snap, that sucks
Self-employment Tax
Pays into Social Security and Medicare
Typically split evenly by an employee and employer
Self-employed must pay the entire amount
Only applies to net profit generated by a business venture
Your portion on wage income is automatically withheld
Does not apply to non-wage income such as dividends or interest
If you pay both halves, the “employer half” is deductible on your 1040
Deductions! Hooray!
Broken into four primary categories: Start-up Costs Operating Costs Capital Expenses Inventory
Start-up Costs
Operating expenses before the business begins
Mortgage/rent, Utilities, and Supplies
Market research and advertising
Employee training
Legal, professional, and financial fees
Limited to $5000 the first year; any remainder is split over 15 years
$20000 in start-up costs would mean deducting $1000/year for 15 years
…except the first year is prorated; e.g. starting July 1st would mean $500 that year
If the business never launches, start-up costs are non-deductible
Best to just delay some spending until the business actually starts
Which is the day you are “ready to produce goods or services for customers”
Operating Costs
Most things that were start-up costs become operating costs
The day to day catch-all expense of doing business
Must meet four requirements:
Ordinary and Necessary
Current Expense
Directly related to your business
Reasonably priced compared to similar alternatives
Capital Expenses
Anything that costs over $100 and is expected to last a year or more
A $50 bookcase that last several years is still an operating cost
Includes non-tangible assets like copyrights and patents
Includes real estate and structures
Must be depreciated, not deducted outright
Depreciation
The means by which you recapture your tax basis over several years
Tax Basis – your original financial investment in an asset
Adjusted Basis –current financial investment in an asset, minus depreciation, etc
Traditional Depreciation – cost is split relatively evenly over item’s lifespan
Bonus Depreciation – basically like regular, but you get 50% the first year
Section 179 – Awesome. The best. 100% write off.
Section 179
Writes off 100% of an asset’s cost in the first year
Cannot claim more than $500,000 a year this way
Limited to assets with > 50% business use (vs. personal use)
Limited by net business income
Excess deduction amounts carry forward as many years as necessary
Other income such as W-2 wages count towards this income limit
That’s cool
Traditional and Bonus Depreciation
Allows you to “budget” deductions, ensuring you have some next year
Not really that great an idea; ties up cash you could have NOW.
Can’t always use Section 179:
Assets with less than 50% business use
Personal property converted to business use
Land and buildings
Intangible assets such as copyrights and trademarks
Gifts or items purchased from a relative
Heating and air conditioning units (what? Yeah.)
Depreciation Methods
Items are classed according to perceived useful lifespan in years
Each type of item has a standard lifespan decided by the IRS
Straight-Line method:
Divide cost by years of lifespan
Take a half payment the first and last years, whole payment in all others
Accelerated method:
Uses a front-loaded bell curve
Eventually returns less in a year than Straight-Line method
Both ultimately return the same amount
Inventory
Items that are purchased or produced with the intent to sell them
Nope.
Home Office
Must meet all three primary guidelines:
Currently in business
Space is used exclusively for business
Used for business on a regular basis
…And any one of the following:
Is your principal place of business (not only, just principal)
Regularly and exclusively used for administrative activity
You meet clients at home
You have a separate structure on the premises exclusively for business
You store inventory or run a day care.
Home Office Calculatin’
Two methods of devising percentage of home – use whichever is better!
Divide your “office” square footage by overall square footage
If it’s a whole room, divide that room by the total number of rooms
PROTIP: Only count “useful” space, not bathrooms, stairs, hallways, attic, garage, etc
Direct expenses benefit only that space and are 100% deductible
e.g., painting just that room
Indirect expenses benefit the whole house; apply the above percentage
Mortgage/rent, utilities, insurance, maintenance
Limited by net income from relevant businesses, but excess rolls over
Travel, Meals, and Entertainment
One of the most abused deductions!
Only 50% deductible
“Entertainment” must:
Be something “Fun” which is not normally part of your business
Not be considered advertising or promotional in nature
Protip: is it open to the public? Promotion. Invite only? Entertainment
Involve someone who can benefit your business (and not just employees)
Cost a reasonable amount compared to similar activities
Involve discussion before, during, or after, with a clear business purpose
“How’s Business?”
“Great!” Discussion “before or after”:
Does not require a specific purpose
Can be up to a day before or after entertainment
Discussion “during”:
Must have a specific focus
Must have reasonable expectation of a specific benefit to company
Only costs associated with business guests are deductible
Transportation
Keep detailed records on auto mileage and expenses
And really, everything else you intend to claim
You need total mileage for the year, and business miles for the year
Record your odometer at the beginning and end of the year!
Business Use percentage is simply (business miles / total miles)
Business Miles
Business miles are spent traveling to a business location, such as:
Your actual place of business
Temporary job sites
Meetings with clients and customers
A store for business supplies
Your business’s bank
A school where you take business-related training
Business miles can be counted even if you also do something personal
You don’t have to be driving, or even present in the car
Commuting
Travel from home to “work” and vice versa
Employee commute miles are rarely deductible
Your first business place of the day becomes that day’s primary work site
Neither your trip there or your trip home can be deducted
Unless you have a home office!
Calculating Auto Deduction
Divide business miles by yearly total miles to get business use percent
Standard mileage rate: 56.5¢ in 2013
Just multiply (mileage rate * business miles), done!
Can still claim parking and toll fees, and car loan interest (limited by business use percent of car)
If standard mileage is not used for a car’s first year, it cannot ever be used
Actual Expenses – total up all real expenses, apply business use percent
Gas, oil, other fluids
Repairs and maintenance
Car depreciation
License and registration fees
Health Insurance
Self-employed health insurance is deductible directly on 1040
Considered purchased by you or your business
If purchased by a business, limited by net profit from that business
If purchased by you, you choose which business determines the limit
Either way, limited to income from a single business entity
Education
Education must either:
Maintain or improve skills that are required by your existing business
Be required by law to maintain your professional status
Most aspects are deductible
Books
Tuition
Lab fees
Travel
Further Reading
http://www.nolo.com/
I don’t work for them or get kickbacks :p
Thank you!
To KLRU
City Hall
John Henderson
The Austin IGDA Chapter
Me!
You guys!