Money, Debt and 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.

• Publication 334, Tax Guide for Small Business
• Publication 535, Business Expenses
• Publication 505, Tax Withholding and Estimated Tax

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.

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.