Download Self-Employment Taxes and You

Self-Employment Taxes and
You.
Aaron Standridge
@aaronstandridge
A new lawsuit is filed in the
United 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!