Archive for the 'Self-Employment' Category
Friday, January 21st, 2011
Here’s a decision chart that’ll amuse those of you who work independently, perform some freelancing/consulting work, or just happen to be especially good at something. Should you do the work for free? Well, it depends:
(click to visit site)
By Jessica Hische at ShouldIWorkForFree.com.
Thursday, January 13th, 2011
If you have extra income outside of your W-2 paycheck in 2010, this is a reminder that the deadline for 4th Quarter 2010 estimated tax payments is Tuesday, January 18th, 2011. (Updated: January 15th falls on a Saturday, and the 17th is a federal holiday.) Estimated tax payments help you make sure Uncle Sam gets his share of income that doesn’t automatically withhold taxes. This is the last chance for 2010, otherwise you may be hit with taxes and penalties by the time you file your tax return.
According to IRS.gov, generally you must pay estimated tax for 2010 if both of the following apply:
- You expect to owe at least $1,000 in tax for 2010 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown on your 2010 tax return, or
- 100% of the tax shown on your 2009 tax return. Your 2009 tax return must cover all 12 months.
Need help estimating how much tax you’ll owe? Try the new TaxCaster widget from TurboTax. It’s free and designed to estimate your refund, but that also means it estimates your potential tax bill as well. Since an estimate is all you’re looking for, I found the tool quite handy. Be sure to enter all your extra income in the Total Income section:
How do I pay? You can pay estimated taxes using the 1040-ES mail-in voucher or online at EFTPS.gov.
Thursday, December 23rd, 2010
I just received the following e-mail from Half.com, where I occasionally sell used books:
We’re writing to let you know that starting with transactions occurring on or after January 1, 2011, new Internal Revenue Service (IRS) regulations require Half.com (and other businesses that process payments) to file a Form 1099-K for all sellers with more than 200 transactions and $20,000 USD in sales per year.
If you’re a high-volume seller who has met or is close to meeting the IRS thresholds, we may need to generate a Form 1099-K for you. If you have multiple accounts, we’ll take all of them into consideration when calculating your volume status. If you exceed the IRS thresholds, we’ll send your first Form 1099-K to you in early 2012. Your Form 1099-K will give you a consolidated report of all payments received through Half.com for 2011. This information will also be reported to the IRS.
Apparently, as part of new legislation designed to help track down (and tax) unreported income, starting in 2011 any credit or debit card payment processor with clients that have more than 200 transactions and $20,000 in sales per year must file a 1099-K with the IRS.
In addition to Half.com, this also includes individual sellers using services like PayPal and Amazon.com. Perhaps also sites like Etsy and Zazzle? This won’t affect me, but I think it’s a pretty good idea. I do feel that lots of eBay income goes unreported, and the limits are reasonable. If you’re clearing 200 transactions and $20k in payments, you should be tracking your income and expenses like a business. This 1099-K won’t really matter as it just reports gross amounts.
I’m more scared about the upcoming changes in 2012 that says that a business has to file a 1099-MISC for any person or business it pays more than $600 in a calendar year. Corporations are no longer exempt. That’s a ton of 1099 forms swirling around. I’m going to have to send W-9 forms to everyone from Staples to my web hosting company. I still hope they’ll change this rule before it goes into effect and swamps tons of small businesses.
More info: CNN Money, Journal of Accountancy, Stop1099.org
Wednesday, December 22nd, 2010
While procrastinating today, I of course ran across a couple of tips on productivity and success that both powerful and very different.
First is an essay called Good and Bad Procrastination by Paul Graham. It includes a lot of insights into procrastination, and my favorite was the idea that it was okay to put off less important, scheduled, to-do list-type things whenever you get a chance to focus and do some really great things:
The reason it pays to put off even those errands is that real work needs two things errands don’t: big chunks of time, and the right mood. If you get inspired by some project, it can be a net win to blow off everything you were supposed to do for the next few days to work on it. Yes, those errands may cost you more time when you finally get around to them. But if you get a lot done during those few days, you will be net more productive.
In fact, it may not be a difference in degree, but a difference in kind. There may be types of work that can only be done in long, uninterrupted stretches, when inspiration hits, rather than dutifully in scheduled little slices. Empirically it seems to be so. When I think of the people I know who’ve done great things, I don’t imagine them dutifully crossing items off to-do lists. I imagine them sneaking off to work on some new idea.
The second is the Jerry Seinfeld Productivity Secret by Brad Isaac:
He told me to get a big wall calendar that has a whole year on one page and hang it on a prominent wall. The next step was to get a big red magic marker.
He said for each day that I do my task of writing, I get to put a big red X over that day. “After a few days you’ll have a chain. Just keep at it and the chain will grow longer every day. You’ll like seeing that chain, especially when you get a few weeks under your belt. Your only job next is to not break the chain.”
“Don’t break the chain,” he said again for emphasis.
This idea of incremental change is not new – see this post on Kaizen for example.
Some things are best achieved when you attack it a little every day – things like debt reduction, learning a language, or weight loss. Other things you may have to wait for the inspiration, but when it comes, it pays to put it above all else. Perhaps a great business idea or investment opportunity.
Thursday, July 22nd, 2010
Above is a chart of the median duration of unemployment from the past 50 years, based on data supplied by the US Department of Labor. That’s quite a scary spike we have going right now. (Chart source, via The Atlantic and Greg Mankiw.)
Not coincidentally, the Senate just voted to extend employment benefits again after much debate. This means that the federal government will continue to provide up to 99 weeks of unemployment assistance, including the first 26 weeks provided by individual states.
People will argue whether this is the best way to combat the problem. I don’t know the answer, especially with the huge deficit, but I do feel that with two years of unemployment available that there is less excuse not to learn some new marketable skills if you need it. Also, this just makes my cash hoard of a year’s worth of expenses that much more important to me. I really didn’t think an emergency fund would provoke such a strong psychological response, but it has significantly lowered my daily stress levels.
If you don’t have your warm fuzzy cash hoard yet, open a separate online savings account and start socking something away! Just look at the chart again if you need motivation.
Monday, May 10th, 2010
The most highlighted passage on the Amazon Kindle eBook device is:
…the more money they made the next day on the streets. Those three things—autonomy, complexity, and a connection between effort and reward—are, most people agree, the three qualities that work has to have if it is to be satisfying. It is not how much money we make that ultimately makes us happy between nine and five. It’s whether our work fulfills us.
From the book Outliers by Malcolm Gladwell. Full list via MR and @willwilkinson.
Thursday, April 29th, 2010
Until now, I haven’t written much about healthcare reform issues – it’s just feels so daunting and politically-charged. I do support the eventual separation of work and health insurance, as I think that all unemployed, partially-employed, and self-employed individuals should get access to affordable healthcare. As the dust settles a bit, I took a look through the many attempts of media to break down the healthcare reform bill into manageable bites. Here are my notes:
- Employers with fewer than 25 employees (more if you have part-time employees) and less than $50,000 in average wages may be eligible for tax credits worth up for 35% of paid premiums. Note: The tax deduction is not available to sole proprietors, so you may want to consider an LLC or corporation form.
- All health insurance plans must allow people to maintain dependent coverage for children until they turn 26. This could help out the many young and self-employed. Also prohibits insurers from denying coverage to children because of preexisting health problems.
- If you are self-employed and have medical conditions that make it hard to find any health insurance at all, there will be a high risk pool set up to create “affordable” premiums. I wonder how affordable that will actually end up being.
- Insurers will no longer be able to put lifetime limits on coverage, or cancel policies that are already in service (except for fraud).
- Starting September 2010, all coverage must include basic preventive care. As many small businesses can now only afford catastrophic coverage, this may mean additional benefits.
- Companies with less than 100 employees will be eligible for grants to set up wellness programs. Employers can offer employees bonuses of up to 30% of the cost of insurance.
- Limits medical expense contributions to tax-sheltered flexible spending accounts (FSAs) to $2,500 a year, indexed for inflation. (I wonder how much it costs to administer one of these for a self-employed person.)
- All U.S. citizens and legal resident must have health insurance, or else pay a fine. People who are satisfied with their employer-provided coverage don’t have to do anything.
- Health plans no longer limit coverage based on preexisting conditions, or charge higher rates to those in poor health. Premiums can vary only by age, place of residence, family size and tobacco use. Wow!
- Individuals and small businesses with up to 100 employees will be able to shop for coverage from newly-created health insurance exchanges. Theoretically, this will allow individuals to get rates just as competitive as current large group plans.
- Small business owners who purchase coverage through the exchanges can receive a two-year tax cut for up to 50% of what they contribute toward their employee health insurance premiums.
- Individuals may receive income-based tax credits for insurance bought from the exchanges. Sliding scale credits will eventually phase out for households above four times the federal poverty level, until about $43,000 for an individual or about $88,000 for a family of four.
Sources: CS Monitor, Health Reform and Small Business, USA Today, HealthReform.gov
Monday, February 8th, 2010
Did you as a small business pay another person or business more than $600 total in 2009 for services rendered? You may have to provide them a 1099-MISC form. There are lots of rules, see the 1099-MISC Instructions for complete details. Here’s a summary:
The Internal Revenue Service (IRS) requires businesses (including not-for-profit organizations) to issue a Form 1099 to any individual or unincorporated business paid in excess of $600 per calendar year for services rendered. This is required whether these payments are spread out over the course of the year or are paid in one lump sum payment. The most effective way to obtain the information needed to prepare the Form 1099 is by requiring that an IRS Form W-9 be completed prior to any payment being made. The penalty for failure to file Form 1099 can be as much as 50% of the amount paid for services.
If you’ve got your own accountant or payroll service, then you can pay them to generate the proper forms and send out these 1099s. (They are supposed to be sent out to independent contractors by January 31st following the end of the tax year in which you made the payments.) But if you’re a micro-business or a one-person show and still do all your own taxes, you can easily generate a few 1099-MISCs yourself.
You can get blank forms sent to you for free from this IRS order form. You’ll need at a minimum, Form 1099-MISC and Form 1096. You cannot use the PDFs that you find online; they are only examples. The page says it may take 4-6 weeks, but I got mine in less than two weeks. If you need them faster, you can buy them from any office supply store like Staples or OfficeMax. As noted above, get a W-9 form filled out by the person you paid, and follow the directions.
Finally, if you buy TurboTax for Business (not the personal edition), the software can also generate both 1099 and W-2 forms for you.
Thursday, January 7th, 2010
Update: This offer has expired, but there is a coupon code CABIN-20D good for an additional $20 off their $49 dollar LLC or Incorporation filing package. Net price under 30 bucks!
In case your plans include formalizing your business ventures, MyCorporation is offering their LLC formation and incorporation filing services for free until 1/31 with the coupon code MYFREE. You must still pay shipping fees and the filing fees charged by each state.
Free Corps & LLCs: Regular price of $149 is being waived when coupon MYFREE is used to obtain discount. Document shipping, state fees, publication fees, and additional product fees are additional. Discount valid for orders placed for a new corporation or limited liability company only. Prices subject to change without notice. Limit one discount or coupon per order. Coupon is not valid on any other product or service. You must enter/mention the coupon code at the time your order is placed. Coupon or discount is not valid on previous orders. Refunds/credits/adjustments will not be issued on prior orders.
MyCorporation is owned by Intuit, makers of TurboTax and Quicken. I view such online incorporation services as similar to TurboTax for taxes. Yes, you could fill out your 1040 tax forms manually, but it’s much easier to go through a question-and-answer software that walks you through it and explains the steps. However, if you’re talking about a huge business or something that is complex, then you should hire a professional to handle it (accountant for taxes, lawyer for incorporation).
When I formed my S-Corporation, I used one of their primary competitors LegalZoom and paid about $150 for the service – not including the state filing fees and shipping – so having it done for free seems to be a great deal. (I’m sure they’ll try to upsell you some additional services.) It was good to have someone look over the forms before submitting, while avoiding thousand of dollars of fees from a lawyer for our little venture.
The decision between staying a sole proprietor/partnership or forming an LLC/corporation is not always simple. If you’d like to dig into the details, I recommend the book LLC or Corporation? How to Choose the Right Form for Your Business from Nolo Press. I chose to go the S-Corp route primarily for the payroll tax savings.
(You can even have a LLC and chose to have it taxed as an S-Corp, as if things weren’t confusing enough!)
Friday, February 13th, 2009
I am the President and CEO of a uni-national corporation. A one-person S-corporation, to be exact. I chose this over an LLC for a variety of reasons (most of which I don’t remember anymore), but one of them was – what else? – to save some money. I wrote a relatively wordy post a few years back on Forming An S-Corporation To Reduce Self-Employment Taxes. But I just read this e-mail from MyCorporation* that has a concise example with a nifty graphic thrown in:
In an S-Corporation, only earnings paid to an owner as salary is subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to self-employment tax.
Maria is a sole proprietor bringing in sales of $90,000. After she pays her costs & expenses, her profit is $60,000. As a sole proprietor, she is required to pay self- employment tax of 15.3% on this entire $60K of profit, which equates to $9,180.
Now, let’s assume Maria formed an S-Corporation for her business, and chooses to pay herself $35K for the year in salary, and take the remaining $25K of profit through a distribution. She still earns the same $60K in profit. But, let’s look at the tax situation. Because corporations only pay Social Security & Medicare taxes on salaries, she’s only liable for $5,355, saving over $3,800 in taxes!
If you have a single-person LLC, the tax situation is usually very similar to that of a sole-proprietorship. (I should add that in some states you can also choose to have the LLC taxed as an S-Corporation. I would consult a local attorney for more details on this.) Now, the salary has to be “reasonable” based on the compensation of similar work elsewhere, so don’t get too crazy with this.
The catch? As an employer, the S-Corporation has to pay unemployment taxes. The exact rate varies from state to state, but the federal minimum is about $450 per year if your annual income is at least $7,000. However, as both the employer and employee, it is very difficult for me to actually “lay myself off” and claim unemployment benefits. So this fact cuts slightly into potential tax savings.
* I actually used LegalZoom to file my incorporation papers, which is their main competitor. I don’t really remember any big differences between them, but was happy with my Legalzoom experience.
Wednesday, June 25th, 2008
I got a lot of positive responses from my self-employed tax-related post yesterday. I’ll be happy to continue sharing more of my experiences, but given the complexity of tax issues I wanted to throw out a book recommendation – Home Business Tax Deductions: Keep What You Earn by Fishman.
This is my hands-down favorite book on tax deductions for those with home-based businesses. It has saved me many times the $20 cover cost. I checked this book out from the library first as well, but ordered it online within a few days. I’ve read several other tax books and they are either (1) too light on the details, or (2) too aggressive and bordering on both the unethical and illegal. This book provides a good summary of the IRS code, and practical ways to substantiate deductions that you qualify for.
The primary benefit of a good tax book is that it gives you the confidence to take the deductions that you deserve and qualify for. Many times people simply don’t try because they are afraid of the Big Bad Audit. Instead, I am now confident that I followed the rules and can pass an IRS inspection. Remember the difference between tax avoidance and tax evasion:
Tax Avoidance is perfectly legal. The courts have stated clearly that you have no duty to pay more taxes that what is minimally required by law. You have every right to take all legitimate deductions and also to structure your business to minimize taxes.
Tax Evasion is a crime. This involves fraud, misreporting income, or taking deductions that you do not qualify for.
(Is it tacky to quote yourself?) Even if you have an accountant, I think it is good to understand a bit of what is going on.
Tuesday, June 24th, 2008
An important part of maximizing the profit from your own business – no matter how small – is to be smart with taxes. If you are running a side business on top of your day job, you may be paying around 50 cents of every dollar made towards taxes. This means, that for every $1 in tax deductions you find, you are keeping an extra 50 cents in your pocket.
One of the more tedious tax deductions for self-employed folks is deducting transportation expenses. The simplest way to claim this deduction for those without vehicles used solely for business is to track the number of miles driven for business use. (You can also record actual automobile expenses like gas and maintenance, and pro-rate.) The IRS just announced yesterday that the standard mileage deduction will be 58.5 cents/mile for all business miles driven for the last half of 2008, up from 50.5 cents/mile.
From above, this means that for every single business mile you deduct, you might save around 29 cents. Deducting just 100 miles per month would save you around $350 over a year. Put another way, not tracking 100 miles a month will lose you $350 a year. There are many complex rules for what constitutes eligible business travel, but it can be worth asking your accountant or reading up. Here are some examples:
- Driving to the office supply store to make business purchases.
- Driving from your home office to an external location meet a client.
- Driving to the bank to deposit checks or make other business transactions.
- Driving to pick up mail from your UPS Store or P.O. Box.
- Driving to the post office to send business-related mail or buy stamps.
Many times, you might do this stuff without a second thought. But with gas costs so high, I would argue that we need to recoup whatever we can get. Trust me, these miles can add up quickly!
How do I properly track such mileage? At most office supply stores you can buy a mileage logbook. Or, simply start up a spreadsheet program and create these columns: date, purpose (bank, etc.), odometer start value, odometer stop value. Print it out, slap it on a clipboard, and stick it permanently in your car like I do. Record everything immediately, it should take seconds; you can add up the miles later. (Added: mileage log template for Excel)
What about driving from my self-employed home office to my day job with another employer? Nope, although it would be sweet to deduct such commuting costs, this is not qualified business travel. However, if you have a second site for your own business like a storefront, travel to/from your home office to/from that site can be deductible.
What if my UPS mailbox is next to my day job? Here’s where things get a bit fuzzy. You definitely aren’t allowed to deduct personal trips. But let’s say the supermarket is right next to your business bank. Since you’re already there, isn’t doing some grocery shopping the the eco-friendly thing to do? From my non-official understanding, you would need to prove that your trip to the bank is necessary and the primary reason for the trip, and not just an excuse to go to the supermarket. Making an actual deposit transaction would seem to be sufficient in that regard.
But if you are trying to say that your “business bank” is 30 miles away from your home office and just happens to be the one next door to your 9-5 job, then that may be much harder to justify. It is truly necessary to use that branch?
There’s more… You may also be able deduct mileage driven for charity, medical treatment, job searches, and moving.
References: IRS Publications 535, 463, and 529