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A Tax Road Map For Self-Employed Individuals

Being your own boss can be extremely rewarding, but it can also come with a heightened level of responsibility and details that demand your constant attention. The importance of being organized cannot be underestimated. As a business owner, you wear many hats. You need to manage and direct employees, as well as keep track of sales, while handling marketing, banking, bookkeeping and payroll; all while keeping an eye on tax planning and compliance.

Fortunately, there are computer products available that can make life easier. Microsoft Outlook can help you with scheduling, managing business contacts and sending e-mails. Also, whether or not you retain the services of a good accountant, accounting software such as QuickBooks can help you manage sales, keep your books, reconcile bank activity, process payroll as well as compile the information necessary to file your tax returns.

One very important aspect of running your own business is to ensure that you plan for, and file, your taxes on a timely basis. Following are some common tax issues for the self-employed:

1. Do I Need a Federal Employer Tax Identification Number (FEIN)?
In general, you do not need an FEIN if you have no employees, are a sole proprietor or a single-member LLC or are not incorporated or not operating as a partnership. Instead, you can simply use your social security number. It is important to note, however, that if you have a Keogh retirement plan, you are required to have an FEIN. Banks may also require a FEIN if you are seeking bank financing or are interested in setting up a business bank account.

There are several ways to set up an FEIN. You can contact your local IRS field office, call the IRS Business and Specialty Hotline at 800-829-4933, visit the IRS website at or file IRS Form SS-4.

2. What Is Self-Employment Tax And Will My Business Be Subject To It?
Self-employment tax, also known as Self-Employment Contributions Act tax (SECA or SE), is imposed on net earnings from self-employment (NESE) and is paid in addition to regular income tax. It is the self-employed equivalent of Social Security and Medicare taxes, which are typically paid by employers and employees. As a sole proprietor, independent contractor, single-member LLC or a partner, your NESE is subject to both the employer and employee portions of Social Security and Medicare at the combined rate of 15.3%. C and S corporations do not have NESE and are, therefore, not subject to SE tax.

3. How Much 1099 Income Can I Receive Without Having To Report It?
The answer is none. There is a common misconception that if you do not receive a Form 1099-MISC or were paid less than $600 by any one customer or client, the income is not taxable. There is no minimum amount that you may exclude. You are required to report all of your income.

4. Why Is My Customer Asking for a W-9 Form?

A W-9 Form is the official IRS form used by a company to request your name (or company name), address and taxpayer identification number (either your social security number or FEIN) when you or your business is hired to provide services. This information is used to prepare your 1099-MISC at year end. Generally, however, if your business is incorporated, you should not receive a 1099-MISC.

5. As A Self-Employed Taxpayer Should I Hire An Accountant?
If you have little experience preparing business taxes, it may be a wise investment to seek professional guidance. A good business tax accountant can provide valuable tax and financial advice during the year, as well as point out significant tax deductions and important tax-saving strategies that you might otherwise miss.

Alternatively, you can choose to use tax preparation software such as Intuit’s TurboTax. Today, many tax programs walk you step by step through both personal and home business tax documents in a user-friendly way. Be aware though that tax software can only assist with what you think you should do. If you are not adequately versed in tax law and are unsure about certain deductions, tax programs will not advise you concerning ethical decisions, potential audit red flags, document retention, flawed tax practices or incorrect filing strategies.

6. How Does Being A Business Owner Affect My Taxes?
As previously discussed, self-employment income is subject to both regular income and SE taxes. This may require you to pay quarterly estimated taxes during the year to avoid penalties and interest. Keep in mind that proper tax planning during the year can mitigate a cash flow crunch at tax time. Left unchecked, many self-employed taxpayers find themselves strapped with an unmanageable tax burden at the end of the year. An accountant can be a valuable resource to guide you through the process.

If you are a sole-proprietor or single-member LLC, you report your income on Schedule C, prepare Schedule SE to calculate your SE tax liability and file both with your personal tax return. Other forms may be required as well.

A partnership or LLC with more than one member files a partnership return on Form 1065 and issues a K-1 to each partner or member for their portion of the business income which is then included on their respective personal returns.

Corporations are required to file Form 1120 (C corporation) or Form 1120-S (S corporations), together with a K-1 for each S corp. shareholder. A corporation needs to make an election to be classified as an S corporation on Form 2553 (separate state elections must be made as well) or it will default to a C corporation.

As an alternative, an election can be made to choose how your business will be classified for tax purposes by filing Form 8832.

7. Should I Outsource Payroll Processing?
Payroll processing and human resource compliance has become a hot topic in recent years. Many small businesses today use an outside service to process their payroll, remit payroll taxes, keep track of employee withholdings and pension contributions, maintain human resource compliance, and file quarterly returns and W-2’s. ADP and Paychex, as examples, provide various levels of payroll and HR services that are tailored to your size and type of business. QuickBooks also offers various payroll processing functions, including in-house payroll.

8. What Other Taxes Could My Small Business Be Subject To?
Sales tax is the most common tax that many small businesses face. What most business owners forget, however, is that sales tax is imposed on their customers, not their business; they are merely collecting the tax on behalf of their state’s jurisdiction. By applying to be a sales tax vendor, you will be issued a Certificate of Authority that establishes your business as a fiduciary of the state allowing you to collect and remit sales tax.

Unless your business provides goods or services that are specifically exempt from your home state’s jurisdiction, you will be required to collect and remit your sales tax by filing periodic sales tax returns. In addition, if you run a business that involves internet or other interstate sales, you may be required to file sale tax returns and to collect sales tax on behalf of the other states as well. You are required to apply as a sales tax vendor in all states in which you do business.

We hope this has helped. If you have any further tax questions, please contact Victor C. Belgiorno at 516-861-3704 or  or Bob Jahelka at 516-861-3707 or .

We salute your business success!


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