5 Tax Tips for The Self-Employed

learn about taxes

Tax time can be extra taxing for the self-employed. What really do you count as income? What can you deduct as expenses? And why do you have to pay self-employment tax? Here are a few tax tips to help you prepare your self-employed tax return.

1. What is Self-Employment Income?

Self employment income can be any income that you earn as an independent contractor, a freelancer, or even money that comes in from a hobby. You don’t need to make much to be considered self-employed by the IRS.

2. What Business Expenses Can You Deduct?

The good news is that you can deduct any expenses that you incur to create income. Many people have expenses for items that are used for both business and personal, such as computers and internet costs. In those cases the IRS allows you to take a prorated amount as a deduction. Keep a log showing how much is business use, and how much is personal use to come up with your prorated deduction amount.

3. What is Self-Employment Tax?

When you work for someone else as an employee you have social security taxes deducted from your paycheck. Your employer pays an additional amount. When you are self-employed you pay both parts yourself as self-employment tax.

4. How Do You Report Self-Employment Income?

If you are not a corporation or a partnership you will report your self employment income and expenses on Schedule C. It is filed at the end of the year with your Form 1040. However, taxes are due through out the year. Estimated taxes are paid with form 1040-ES.

5. Where Can I Find More Information on Taxes and Self-Employment?

The IRS has many great resources to help self-employed people with their taxes. Start with these links from the IRS.

Taxes are Illegal?

The man sitting across my desk had been a client for years. He had come in to tell me that he would not be using my services ever again.

“Why?”, I asked.

He had found a lawyer who had told him that income and social security taxes were illegal. All my former client needed to do was file some forms with the government and he would effectively “untax” himself.
“Anyone can do it,” my client told me. “It is just that the government has everyone believing that taxes are required. All you need to do is file the proper forms, and you won’t ever have to pay taxes again. And it is perfectly legal.”

Unfortunately I never saw him again so I have no idea how the whole scheme worked. But every year I have people tell me that taxes are illegal, or unconstitutional, or only for corporations. And every year I tell them that the IRS has said over and over again that taxes are legal, and constitutional, and for everyone with income.

I was looking at a website today, that will sell you a package to “untax” yourself for the small sum of $700. The package will include all the forms you need to send to the government so you will never have to pay income taxes or social security taxes again.

Judging from the page and pages of double speak, the main argument of this website, is that paying taxes is voluntary. They also state that the 16th amendment was never properly ratified, and that wages are not taxable because they are not defined as “income” in the IRS tax code.

Before you fall for this type of scam, please take a moment to read what the IRS has to say about these frivolous tax arguments(pdf file).

If you don’t like reading IRS documents I’ll sum it up for you here. Taxes are legal, the 16th amendment was properly ratified, and wages are income under the law. You can’t avoid taxes by declaring you are not a citizen, by filing any type of “untaxing” paperwork, or by submitting a zero income tax return.

If you choose to use any of these arguments on your tax return the IRS can impose a $5,000 penalty for preparing a frivolous tax return in addition to any other fines or penalties that may be due for underpayment of tax and failing to file a tax return.

The Top Tax Protester, Where Is He Now?

Irwin Schiff is arguably the most prominent tax protester in the United States. He is the author of two books, has presented seminars and appeared on national television promoting his ideas about the legality of the income tax. Most if not all of the tax protester arguments you will hear today originated with Irwin Schiff.

Today Irwin Schiff is a guest of the United States government, serving over 12 years for his 2005 conviction for filing false tax returns, assisting in the preparation of false tax returns filed by other taxpayers, conspiring to defraud the United States, and income tax evasion. He has also been ordered to pay over $4 million in back taxes, fines and penalties.

If You Told People The Truth About Income Taxes You Would Be Out Of A Job

I can’t tell you how many times I have had people tell me that I must know that paying taxes is illegal, and the only reason I don’t tell people is that I would be out of a job. If only it were true. The truth is, if I knew a way that people could legally earn income without paying taxes, I would be more than happy to share it with all my customers, and I am sure they would be more than happy to pay for that information. In fact, I would be the most popular tax adviser in my state.

What To Do When You Can’t Pay Your Taxes

April 15th has arrived, and you don’t have enough money to pay your taxes.  What are you going to do?

First of all, don’t panic. You are not alone. Every year thousands of people come up short when it comes time to pay the IRS.   Here is what you can do when you can’t pay your taxes.

First of all, file your tax return on time.  Pay whatever you can with your tax return.   This way you won’t be subject to the failure to file penalty, which can be as high as 25% of the tax due.  If you won’t have your tax return completed by Apirl 15th, you can file an extension.  But the extension is just and extension of time to file, not an extension of time to pay.

If you know you will be able to pay your taxes within the next few months, you can file and extension with a payment, and then file your tax return and pay the rest of your tax bill at that time. You will still be subject to interest and penalties, but you may be able to avoid the  convenience fees that come with paying your taxes by credit card, or the set up fee the IRS charges for an installment agreement.

But if you have a  really large tax bill, one that might take years to pay off, you are going to have to accept the fees and either  pay your taxes with your credit card, or you can request a payment plan (also known as an installment agreement) from the IRS.

To pay your taxes by credit card you need to go through an authorized payment company.  They will charge you a convinience fee, which is around 3% of the amount that you are paying.  You can find out more about paying by credit card here.

If you can’t or don’t want to pay your taxes by credit card, you can request a payment plan from the IRS. If you owe less than $25,000 and expect to be able to pay your taxes within 3 years your payment plan will usually be accepted. The IRS will charge you a user fee of $105.  You can get the fee lowered to $52 if you have your payments automatically debited from your bank account.  Low income taxpayers may qualify for an even lower fee. You can apply for an installment agreement online here.

Once you have your current taxes taken care of you need to make sure that you are not in the same boat next April 15.  If you are self-employed you will need to pay more with your quarterly estimated tax payments. If you are an employee, you need to ask your employer to withhold more taxes from your paycheck. I know it hurts, but that is the only way to avoid owing next year.

Free Tax Preparation This Saturday

The IRS is calling this Saturday, March 21, 2009, Super Saturday and is offering free tax preparation for people earning less than $42,000 per year. There are over 250 Taxpayer Assistance sites, and hundreds more community sites where trained volunteers will prepare your Federal income tax returns for free.

You will need to bring all your tax papers with you, including social security cards for everyone on the tax return, a photo ID for the taxpayer (and spouse if married), and all your income and expense paperwork.

This is also a good time to get help from the IRS if you can’t pay your tax bill, or if you have other unresolved issues with the IRS. Whatever your income, on Super Saturday, you can go to any of the IRS sites and set up a payment plan to pay your tax bill, or talk to an IRS representative about your tax problems. The IRS says it is committed in these tough times to make it easier for tax payers to pay their taxes.

To find out where you can have your taxes prepared for free, visit the IRS Website.

Over $1 Billion in Refunds Available

Have you filed your 2005 Income tax return yet? That is not a typo, I am asking about your 2005 tax return, not your 2008. The reason I am asking, is because I don’t want the IRS to be able to keep over a billion dollars in uncollected refunds. (Of course, used right that might make a small dent in the national debt.)

According to the Internal Revenue Service over 1 million people who may be due refunds did not file a 2005 tax return. The average estimated refund is over $500. If all of those people do not file a 2005 tax return by April 15, 2009, the IRS gets to keep the money. That would be a shame. I am sure you can put the money to better use than the IRS can.

Many of these refunds are due to people that had tax withheld from their paychecks, but didn’t make enough money to require a tax return. Lower income tax payers may also qualify for the Earned Income Credit which could make their refunds even larger.

So if you didn’t file a 2005 tax return because you didn’t think you needed to, you might want to look into it. What is really nice is that the IRS can give you information on how much was reported to them in income and withholding, so you don’t have to dig through all your old papers trying to find your 2005 W-2’s. But you do need to hurry. Your 2005 tax return must be filed by April 15, 2009, or the IRS gets to keep the money.

You can get current and prior year tax forms and instructions on the Forms and Publications web page of IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676). Information about the Earned Income Tax Credit and how to claim it is also available on IRS.gov. Taxpayers who need help also can call the toll-free IRS help line at 1-800-829-1040.

Tax Deductions for Your Online Business

Last year I wrote a post called 101 Tax Deductions for Your Online Business.   I was looking it over today, and thought I would point out a few of my favorites.

#10. Business related webinars and seminar fees. This is one of my all time favorite deductions, because I love to travel, and I love to be able to write off my travel. As long as the main purpose of your trip is business, and you spend the majority of your time in business related activities, you can write off all your travel expenses. So for example if your business is web design, and you go to a seminar for web designers where you can meet vendors, potential clients, and learn more about the latest advance in web design, you can write off your airline tickets, hotel fees, and 50% of your meals. Just make sure you have a real business purpose for the trip.


#58 – 66 Start up and organizational costs. Until you actually open your virtual doors and are “in business” you can’t deduct the expenses you incur while getting your business started. However, once the business is started you can take your start up and organization costs, and amortize them over “not less than 60 months”. With amortization, you don’t get to deduct all your expenses at once, but you do get to take a portion each year for 5 years. This can be to your advantage, because you will be deducting expenses in later years, when you will probably be making more money.

#98-101. Qualified Home Office. Sometimes thought of as an audit flag, a qualified home office done right is a great tax deduction. If you have a place in your home that is used regularly and exclusively for business, you can write off a portion of your mortgage, rent, utilities and home improvements. Just make sure you follow all the rules carefully and you will have a great tax deduction that will stand up to an auditor.

What are your favorite tax deductions for online businesses? What are the strangest things you have heard of people deducting for their business?

Help From the IRS for Struggling Home Owners

Many years ago I was doing a tax return for a couple who had had quite a few major financial setbacks the previous year.  They had just barely managed to stay in their home.  They had avoided foreclosure because their lender was willing to work with them.  Their loan had been totally redone and the lender had “forgiven” $25,000 of the debt.  This meant the couple was able to make the payments on their new, smaller loan.  After a difficult year financially, they were looking forward to getting a refund when they did their taxes.  They were going to use the money to pay off a few credit cards they still owed on.

It was my difficult job to tell them, that in the eyes of the IRS, debt forgiveness is taxable income.  When you have a loan for $200,000 and the lender lowers that to $175,000, the IRS treats that as income. From their perspective, it is just the same as earning $25,000 and using it to pay down your debt.  My clients were very unhappy when I told them, that only were they not going to get a refund, they now owed the IRS several thousand dollars because of their debt forgiveness.  Talk about kicking someone when they are down!

With the current mortgage crisis, many lenders are working with mortgage holders to restructure loans, and they are forgiving  part of the principal due.  It this housing market it can make a lot of sense. It is better to lose some debt repayment, then to foreclose and get stuck with a house the bank can’t sell.

The IRS has decided to help out homeowners, and for tax years 2007, 2008, and 2009, homeowners will not be required to pay taxes on certain debt forgiveness on mortgages.  If you think this will apply to you, make sure to talk with your tax preparer.  Certain forms must be filled out, and not all home debt will qualify.

Here are some more details from the IRS.

There is now tax relief for struggling homeowners. If your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

If your debt is reduced or eliminated you will receive a year-end statement (Form 1099-C) from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for your home (Box 7).

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Web site at IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. This publication and Form 982 can be downloaded from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

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