Tax Tips for Self-Employed; Missed Deductions by General Taxpayers

It’s time to start gathering those financial statement pertaining to 2011 and get them off to your accountant. For those who are self employeed, you have a little more to think about with respect to your corporate return or Schedule C.  This week’s guest Blogger, Cory Lee CPA, CVA, shares a few tips for the self-employed, as well as some common deductions missed by taxpayers in general.

Enjoy!

Lori T. Williams, Owner/Managing Attorney

Your Legal Resource, PLLC

Tax Tips for the Self-Employed and missed deductions by general taxpayers 

By: Cory Lee CPA CVA

There are many types of benefits that come from being your own boss.  When working for yourself, as an independent contractor, or carrying on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points you should know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You calculate your self-employment tax using a Form 1040 Schedule SE. You can also deduct half of your self-employment tax in figuring your adjusted gross income.

3. You generally report your earnings on Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Some commonly overlooked deductions include:

State Sales Tax;

Reinvested Dividends;

Charitable Deductions;

Student Loan Interest Paid by Mom and Dad;

Job Hunting Costs:

a.   Food, lodging and transportation if your search takes you away from home overnight;

b.   Cab fares;

c.   Employment agency fees;

d.   Cost of printing resumes, business cards, postage and advertising. However, Job-hunting expenses incurred while looking for your first job do not qualify.

Moving Expense to Take Your First Job;

Child-Care Credit;

Military Reservists’ Travel Expenses;

For the Self-Employed: Deduction of Medicare Premiums;

Estate Tax on Income in Respect of a Decedent; 

– This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax.  Basically, you get an income tax deduction for the amount of estate tax paid on the IRA assets you received.  Let’s say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor’s estate added $45,000 to the estate tax bill.  You get to deduct that $45,000 on your tax returns as you withdraw the money from the IRA.  If you withdraw $50,000 in one year, for example, you get to claim a $22,500 itemized deduction on Schedule A.  That would save you $6,300 in the 28% bracket.

_________________________________________________________________________________

Cory Lee, CPA, CVA, of ShindelRock, specializes in serving clients in sectors such as medical practices and real estate, including construction, residential, office building, industrial buildings, and land development. Additionally, he provides tax research and advice to clients and oversees the preparation of business valuations, as well as individual, partnership and corporate income tax returns.  Cory is a Michigan State University graduate and holds an MBA as well as a Master’s of Finance from Walsh College.  For more information or assistance, please contact Cory Lee at 248-855-8833 or visit his blog at www.viewfromtherock.com.

Lori T. Williams is a 22 year attorney based in Birmingham, MI. She owns a legal referral and legal consulting business called Your Legal Resource, PLLC. She assists individuals and small businesses in need of legal advice or representation by connecting them with the right legal specialist for their situation. She also provides consulting services for attorneys and other professional service providers on how to generate more business through effective branding, marketing, networking, and by creating strategic partnerships. For more information, visit www.bestlegalresource.com.