All Financial Matters

Home Office Deductions

You have started a new business in your home. If your business continues to operate from there, you may be eligible for a home office tax deduction. Read on to find out if the way you operate your home business qualifies you for this deduction.

When this subject was first approached, deductions were claimed for things like using the family room to address envelopes for business invoices. The home office deduction has been narrowed down to weed out uses that don’t qualify.

The use of the home for business has to meet certain requirements. The use needs to be exclusive, regular, and for business. The room in your home where you conduct business is the primary place of business even if you have someplace else where you also conduct business activities.

This does not mean that the family room can be used for a home office deduction if you address envelopes once a week. The “exclusive” requirement means that the room is used for business and nothing else. A room can’t double as the office and qualify for the home office deduction.

This also goes for equipment in the home office. The use of the equipment has to be for business and not personal use. If you have one computer in the home, chances are the other family members are using it when you are not.

A room that is set up as an office and is only used as such would qualify for the home office deduction. Any equipment for the business that can fit needs to be in that room to ensure that no one else is using it for personal stuff. For a qualified room, a portion of the interest paid on mortgage payments, taxes on the home, and utility bills can be deducted. Take the square footage of the room and find out what percentage it comprises of the total footage of the home. This is the percentage of the bills that can be deducted for the home office.

Those who don’t qualify for the home office deduction are not left out in the cold. There are other ways to garner a tax deduction for your business. You can deduct the amount of money spent on equipment that is used for the business. This includes paper clips, printers, computers, copiers, pens, computer paper, and the like.

Exceptions do exist to the exclusivity rule that applies to the home office deduction. If the office is used as a daycare facility or to store inventory, the square footage of the room can be deducted. The deduction for the home office is limited by the amount of profit that you make from the business.

Add up your business expenses and the amount of profit you made during the current tax year. When profit is more than or equal to the business expenses, you can claim all deductions that apply for the home office. On the other hand, if your business expenses are more than the profit you made, the home office deduction is limited.

Finding the Right Tax Preparer

The tax preparation and filing process is easier than ever these days. With software like TurboTax, people can do their taxes at home without any significant problems. The software checks the work and explains each step to you. But for a small business, whether home based or in a storefront, the job of preparing taxes can be more complicated. If you need a tax professional, find one to fit your needs.

People are afraid to make a mistake on their taxes. They have nightmares of officials in dark suits with shiny badges coming to arrest them in the middle of the night for tax fraud. Besides the fact that we probably watch too much television, there is nothing to worry about. If you are in doubt about your skills in the tax department, there is no shame in hiring a professional.

All tax preparers are not the same. During the months of January through April, you can find a tax preparer on every corner and in every newspaper. People advertise their services for tax preparation all over the place. Unfortunately, some people have been badly burned by a crooked preparer.

Do some research before deciding on a person to choose. What are their credentials? How long have they been doing taxes? Are they familiar with small business deductions and tax forms?

Small businesses require more knowledge on the tax end than individual returns. A tax preparer who has worked with other small businesses is a must. Even if you are new to business tax laws, they have all the forms you might need to file your taxes. They can answer your questions about small business related exemptions and deductions. If they can’t, they know where to find the answers.

Some tax preparers like H&R Block or Jackson Hewitt may deal with small business returns. Ask about their expertise before sitting down with just anyone. It is better to ask now and not get cheated out of money that is due you from the IRS.

Accredited tax advisors and preparers have received their accreditation from the Accreditation Council for Accountancy and Taxation. They have completed ninety hours of continuing education in addition to the requirements for accreditation. These individuals have been trained to handle small business tax returns and to find all the deductions you need.

Certified Public Accountants (CPA) are also qualified to do tax returns for small businesses. These individuals have taken state exams to certify them as public accountants. If you do find yourself in trouble with the IRS, they can represent you in the case.

A search of state websites for tax preparers can give you names of accredited tax preparers and CPA’s in your area. Don’t go it alone. When your tax return needs an expert touch, search for a professional to help you out.

Employee or Independent Contractor?

There is a difference between an employee and an independent contractor when it comes to classifying the two for tax purposes. Misjudging the distinction could cost the company money in fees and penalties. Below is a description of both so that an employer can avoid trouble due to mistakes.

An employee of a company is someone who is subject to the rules and regulations of the company. The job they perform is dictated by the company, which also directs how they do their job and when. Employees may work at home for an employer but they are still working for the company.

An independent contactor is also referred to as a freelance worker. This classification includes artists, actors, writers, and others who perform on a per job basis for a client. Independent contractors have the right to control how the work is done and what is done when they accept a contract from a business. The client only has a say in the look of the completed work.

Independent contractors are working for themselves. Their trade or profession is their business. They are considered self-employed by the IRS and pay taxes according to that classification. Independent contractors receive a 1099-MISC form from each business they deal with showing the amount of money paid to them for their services.

Any business that engages employees is required to pay taxes for those employees. Social security, unemployment, and Medicare taxes are paid by the employer for each employee. The company determines the amount of federal and state taxes withheld based on W-4 information provided by each employee. Employers also provide medical and disability insurance for them if they want it.

Independent contractors are not employees. They receive the full amount for their contracted services. Employers are not required to pay social security or Medicare taxes for them or provide any benefits. Their only cost is the expense of the work.

Mistakenly paying an independent contractor as an employee or an employee as an independent contractor can cause confusion. Independent contractors are responsible for paying their taxes based on their earnings for the year. Since they are both employee and employer, they are taxed at 15.3 percent for social security and Medicare. An employer only pays half of this amount and the employee pays the rest. Independent contractors owe for state and federal taxes as well.

Companies who classify telecommuting employees as independent contractors aren’t paying their requisite portion of taxes owed to the government. When this mistake is discovered, employers are assessed for the full amount of the unpaid taxes as well as a penalty. Depending on how long it has been going on, the sum will be large.

Consider the work of each person in your company carefully. Use the explanations above to determine whether they are independent contractors or employees.

Do I Have to Pay SE Tax?

Self-employed individuals have more forms to look at than just the 1040. All those forms can be daunting and start to look the same. Before you start pulling out your hair, find out if you are subject to pay any self-employment taxes.

The self-employment tax applies to individuals who have been deemed “self-employed” according to the IRS. Self-employment is determined by the ownership of the business or trade that you engage in. When the decision about how to direct the method of providing those goods and services rests with you, then you are self-employed. Freelancers and independent contractors are considered to be self-employed as well.

The business enterprise can be home based or run in an office building downtown. It can be conducted completely on the Internet or from your garage. The location doesn’t matter. The government looks at the amount of profit that is received.

As a self-employed person, if the business earns $400 or more during the previous year, that money is subject to the self-employment (SE) tax. Church employees who earned more than $108 and didn’t receive a W-2 form are subject to self-employment tax. The W-2 form shows what taxes are deducted from your pay by an employer. Without it, you are an independent contractor and are classified as self-employed.

Now, the money that you make will have deductions and exemptions that apply just like people without businesses. Anything that factors in to lower your taxable income will lower the tax bill at the end of the year. People who have an idea that they will owe more than $1,000 in taxes can pay their taxes throughout the year on an estimated basis.

In addition to the 1040 form, self-employed individuals fill out a Schedule SE form. The form details who qualifies to fill out the form and whether you must use the short SE or the long SE form. A flowchart on page one directs the filer to one or the other.

Most individuals with small businesses and church workers without a W-2 fill out the short SE form. Businesses that made over $97,500 in the tax year are required to file the long SE form. Individuals with unreported tips and uncollected social security or Medicare taxes for wages earned are required to file the long SE form, too.

Each line explains what needs to be entered there. You will enter the amount of earnings for the tax year before deductions. Tax deductions that may apply are recorded on a separate form that works in tandem with the Schedule SE.

There are additional requirements for businesses with employees. Employment taxes must be paid for each employee. If you’ve ever looked at your check stub, this is the federal, state, social security, and Medicare amounts. Visit www.irs.gov for more information on self-employment taxes for individuals and businesses with employees.

Am I Considered Self-Employed?

During tax time there are often more questions than answers among tax payers. Everyone wants to know what deductions and exemptions they qualify for so that they don’t have to pay a lot of money to the government. One question that is asked concerns the issue of self-employment.

Am I self-employed? People have hobbies and leisure time activities that have made them money. EBay is a popular way to make extra money by selling the things we have lying around the house. But, does that qualify me to be self-employed? Let’s find out.

According to the IRS, a self-employed person is someone who is the sole owner of their business enterprise. It also includes independent contractors. Independent contractors sell goods and services to others but they are the ones who decide how to do that.

The term “self-employment” covers a variety of individuals. You don’t have to have a business name on file to be considered self-employed. Your business as a freelancer whether it is writing, photography, or another enterprise may not necessarily require it. Online work with a service where you don’t need to advertise for yourself may not facilitate the need to think of a business name.

On the other hand, if you have drawn up the business cards and are handing them out like candy, you are the owner of a business. You have a name and a product that you want others to buy. The work that you do is client driven, but the control over how the work is completed is still in your hands.

Office space doesn’t dictate whether you are self-employed. Small business owners work from their homes out of one room. The trend is towards lower overhead to maximize the amount of profit and lower the cost it requires to get a new business off the ground. Catering businesses have been started out of home kitchens. Toy businesses can be started in your garage.

Having another job doesn’t affect self-employment status either. Working for someone else from nine to five Monday through Friday won’t keep the government from viewing your other money maker as a separate business. The business can be a part-time enterprise that you started to make extra money.

All of these people are considered self-employed individuals according to the federal government. Once it has been determined that you are self-employed, think about applying for a business license and making it official by registering the name of the business. Freelancers and other independent contractors are included in this group.

Self-employment distinctions are important for tax purposes. There are filing requirements for the self-employed and additional forms to use. No one wants their friendly business enterprise to run afoul of the law.

For more information on self-employment designations, visit www.irs.gov/businesses. They provide articles on all aspects of business from small home-based businesses to larger enterprises.