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!