Tag Archive for work at home

$1,500 Home Office Deduction Option – IRS Reminder

The IRS reminded people with home-based businesses that this year for the first time they can choose a new simplified option for claiming the deduction for business use of a home.

In tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 billion.

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually. Read More

Written by | Posted in IRS • Small Business

Your Hobby May Cost More Than You Know

TaxConnections Picture - Make money onlineOne of the advantages of owning a home-based business is the ability to deduct expenses that would otherwise be non-deductible for federal income tax purposes. However, you should and must be conducting the business in a business-like manner with the intent of making a profit. Otherwise, the Internal Revenue Service might disallow your home-based business deductions and your hobby may cost more than you know. You cannot conduct your business in such a way for the purpose of merely producing “write-offs” for tax purposes. Not only is that unethical, it is illegal. If you are the typical home-based business owner, you likely run your business in an ethical manner with an intent of making a profit. You might think that the phrase “intent of making a profit” is self-explanatory, but the determination as to the profit intent of one’s business is often more subjective than objective. Therefore, in the event of an audit, the IRS uses nine relevant factors to determine whether or not your business qualifies for home-based business tax deductions. Review these factors and consider whether your home-based business is in compliance. You may find areas in the conduct of your home-based business which need improvement.

According to the IRS website, whether or not an activity is presumed to be operated for profit requires an analysis of the facts and circumstances of each case. Deciding whether a taxpayer operates an activity with an actual and honest profit motive typically involves applying the nine non-exclusive factors contained in Treasury Reg. Sec. 1.183-2(b). Those factors are: Read More

Written by | Posted in Federal • Individual • North America • United States

Business Use Of A Personal Vehicle

The rules regarding deductions for federal income tax purposes related to business use of a personal vehicle are often some of the most misunderstood rules in the world of taxes.  Generally, the costs of commuting from a taxpayer’s home to their regular place of work are nondeductible personal expenses.  What “commuting” expenses then are considered deductible?

Commuting expenses are deductible when going between a taxpayer’s home and work location if:

  1. The expense is for going between the taxpayer’s home and a temporary work location outside the metropolitan area where the taxpayer lives and normally works.
  2. The taxpayer has one or more regular work locations away from home and the expenses are for going between home and a temporary work location in the same trade or business, regardless of distance, or
  3. The taxpayer’s home is the taxpayer’s principal place of business, and the expenses are for going between home and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.

A work location is considered temporary if employment is expected to last and actually does last for one year or less.

To determine whether the home is the taxpayer’s principal place of business, consider the following:

  • The relative importance of the activities performed at each place where the taxpayer conducts business and
  • The amount of time spent at each place where business is conducted.

A home office qualifies as the principal place of business if the taxpayer:

  1. Uses it exclusively and regularly for administrative or management activities of his trade or business.
  2. Has no other fixed location where substantial administrative or management activities for the trade or business are conducted.

The amount of the deductible mileage expense can be calculated using either actual expenses or the standard mileage rate.  For 2013, the standard mileage rate is 56.5 cents/mile.  Note that a taxpayer may convert from the standard mileage rate to the actual cost method any year.  However, if the actual cost method was used in the first year the vehicle was used for business, a taxpayer cannot convert to the standard mileage rate method in a later year.  Mileage logs should be maintained to document the total miles driven for the year, the total business miles driven for the year, the date the vehicle was placed in service, and the basis of the automobile (if actual cost method is used).

In summary, commuting from home to a regular or main job is never deductible.  Commuting to a temporary work location or a second job from a regular or main job is always deductible.  Commuting to and/or from a temporary work location and/or a second job is always deductible.  Commuting from home to a temporary work location is deductible if you have a regular or main job at another location.  Commuting from home to a second job is never deductible; you must have gone to the regular or main job first.

If you would like more information on how you can convert your nondeductible mileage and other expenses such as rental costs of your residence, to tax saving deductible expenses, fell free to contact me.

IRS Circular 230 Disclosure:  In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

 

Written by | Posted in Federal • Individual • TaxConnections

Penny Taxwise Ponders Incorporation

We meet again, you tax-paying rascals! Penny here, and I’m back atcha with another installment of Penny Taxwise. As you loyal readers out there know, your ol’ pal Penny is rocking the whole work-at-home mom gig like crazy this year. At the end of 2012, my little freelance writing biz exploded and I’ve been struggling to catch up with the success.

To compound things further, I’ve branched out from the freelance writing to a variety of other endeavors – a blog, websites, and an upcoming info product line to be exact. I expect to earn a significant amount of income from these things over the next couple of years, and it dawned on me that I should think about taking the plunge and becoming an actual business.

Naturally, I’ve been researching the heck out of the idea this week. I was spurred by a question that was posted recently right here on TaxConnections:

Oh man. That’s my biggest fear realized. I try to do everything by the book, but I fear the wrath of Uncle Sam when it comes to incorrect self-employment tax records – I think all freelancers feel the same way. Patrick O’Hara, Tax Pro and Owner/Enrolled Agent of CHR Associates in New York, jumped at the chance to respond:

 

Well, wow. His reply was the final push over the edge I needed to finally make a real effort with my business structure search. Off I went to learn about business entities, and boy… did I learn a lot!

Why I’m Thinking LLC

Since Mr. Taxwise and I have our own property to protect, I want to form a legal structure for my business that will shelter us from any potential lawsuits against our personal assets down the road. If you’re wondering why I’m so worried about that with nothing but a teensy Internet biz to show for myself, allow me to enlighten you.

My ultimate goal is to eventually purchase rental properties. It’s something I’ve wanted to do for the better part of ten years, and my online adventures may just allow me to build up enough savings to break into the game. However, if I choose to file as a sole proprietor, my personal assets won’t be protected.

That’s why I decided to go for incorporation. I learned that there are three basic types of legal entities freelancers could form if they choose to incorporate: an S Corporation, a C Corporation, or an LLC (Limited Liability Company). Each comes with its own benefits and drawbacks for freelancers, so picking the right one is vital for protecting your bottom line.

According to an awesome SBA writeup I found, S Corporations, if owned by one single shareholder (the freelancer), allow only the earnings to be subject to employment tax. If the S Corp freelancer makes quite a bit one year, he or she can take a fraction of that year’s earnings as a paycheck and the rest as “profit through distribution to shareholders.”

The S Corp does have a major downside, of course. It demands yearly legal hoop-jumping, including accomplishing compelling tasks throughout the year – requirements such as holding regular shareholder meetings, filing minutes from them, extensive record-keeping, and reporting bylaw updates. Sounds like a blast, right?

On the other hand, a C Corporation is great for people who have small startups that may seek future venture capital to finance expansion. Although there’s flexibility to spread profits around to plan for taxes. However, at the end of the day, a freelancer who chooses this corporate structure will almost always end up with a hefty tax bill due to the whole double taxation thing. Not very fun, either.

That brings us to the newest corporation type around – the Limited Liability Company (LLC). Owners of LLC companies deal with taxes like sole proprietors. They’re taxed on the LLC’s net income, and those taxes are reported on the owner’s personal tax return. The LLC simply acts as a “pass-though entity.”

That was all fine with me since the biggest selling point was the part about an LLC protecting me from legal attacks once I begin dealing with real estate. Plus, if my company doesn’t make much or operates on a loss at first, I can report that on my income taxes. Bonus!

Yup, I’ve definitely made my choice.

Evaluating Your Own Biz

Enough about me… let’s talk about you! If you’re the proud owner of a small biz or a freelancer yourself, it’s important to evaluate your own business needs before choosing a structure. Moreover, you should talk to a tax professional before making any big decisions.

In addition, don’t forget to check with your state for laws concerning your new filing status. Many require different kinds of things from you depending upon the entity you choose.

That’s it for me this week, my taxalicious buddies!

Until next time.

Making Cents Count,

Penny

Written by | Posted in Corporate • Individual • North America • Sales/Use Tax • State And Local Tax (SALT) • Tax Policy • TaxConnections

Penny Taxwise – FEINs for Home Business: Do You Need One?

Ah, so we meet again, my tax-paying co-conspirators! Penny Taxwise back atcha, and this week, I’m continuing the trend started by last week’s post. The topic du jour? Why, taxes for the self-employed, of course! This time, I want to focus on a question asked by a fellow self-employed Tax Connections member. The member writes:

Do I need a Federal Employer Tax ID Number (FEIN) for my home business?

Great question. Let me tell you a little story that I probably shouldn’t. Long before I became a freelance writer (think college years), I tried my hand at a range of other online ventures. The biggest of which was a stint selling clearance items on eBay. Hey, I’m not too proud to own up to my past!

Anyway, I digress. When I was in the thick of my eBay adventure, I spontaneously got the wild idea that I needed a business license and a FEIN. I applied for and received both, though I don’t know why I did. I was losing more money than I was making, and the entire online escapade only lasted for a few short months. I let the business license expire and walked away from my failed attempt as a (faux) business owner. Even though I had a FEIN, I failed to realize what it actually was. Chalk it up to the sophomoric over-eagerness of my early twenties.

Flash forward to thirty-year-old me, and you’ll see a completely new girl. I’m the proud owner of a one-women biz… and it’s thriving. I find myself revisiting the question of whether to obtain my FEIN – only this time, I plan to do a little homework before I apply.

FEIN – Do You Really Need One?

Another Tax Pro to the rescue. This time, Conrado Mangapit rushed to our aid. He’s a tax consultant and instructor with the Chesapeake Bay Development Group in Maryland. He had this to say about obtaining a FEIN:

If you are a sole proprietor filing a Schedule C and have NO employees subject to federal/state income tax withholding, Social Security and Medicare withholding you will not require a federal employer tax identification number.

Hmm… so it looks as if home-based business owners like myself are in the clear. We’re not compelled to seek a FEIN if we’re working alone. Your business tax forms will require nothing more than your social security number if you’re the only one in your biz and you’re blessedly unincorporated. No muss, no fuss. I can dig it, can you?

When a FEIN Becomes Important

Now it’s time to navigate some issues that are a bit tougher to unravel. Namely: what to do when it’s time to expand. One fundamental truth about business is that, eventually, everyone will come to the same major crossroads. Expand, or resign yourself to the maximum amount of earnings you can generate on your own.

I’ve found myself in this exact place recently. I’ve know that no matter how well I think I can write, I’ll eventually reach a point where I can no longer raise my rates for new clients. That’s when my earnings will cap, and I will no longer be able to increase my annual income. Hence, the crossroads. I could accept my fate and toil away at that amount forever… or I could choose to expand my biz.

I can’t imagine that anyone ambitious enough to work at home would choose to paint themselves into a corner by refusing to branch out. I know I certainly wouldn’t. Which brings us back to the question of the day – once you begin taking on outside help, is it time to finally obtain that FEIN?

Answer: it depends. If you’re hiring independent contractors, then you may not need one. If you’re hiring full-fledged employees, however, you will need one for certain. The SBA has a great analysis of the difference between independent contractors and employees, so check it out when you have the time. After I gave it a read, I learned that in my particular situation, I would do best to hire other independent contractors to work with me at arm’s length until I grow into a biz that can actually sustain employees.

Check out this page on the official IRS website and take the interactive quiz. It will ask you questions about your business situation and advise whether you should obtain your FEIN.

Even if you take the quiz and discover you don’t have to secure a FEIN, in some cases, in may still be a good idea to snag one anyway. Sole proprietors are beginning to elect to use a FEIN in much greater numbers – even when they don’t need it – simply because having one dramatically reduces the chances of identity theft. Plus, many banks now require a FEIN to open your business account, so it’s worth looking into.

If you decide to go for it, you’ll need to complete the Form SS-4 to get your new FEIN. Make sure you do it directly through IRS.gov and steer clear of any websites that ask you for payment in order to obtain one for you. It’s a common scam. Moreover, filling out and filing the form is as straightforward as it gets. Easy-peasy. Just go to the source and take care of it on your own.

If you’re still unsure about how to proceed after reading all this, then just take the plunge and get one already! Can’t hurt, and if you do decide to expand in the future, you’ll already have that task checked off your “to-do” list.

Until next time, my tax-talking tulips!

Making Cents Count,

Penny

Written by | Posted in Individual • North America • TaxConnections

Penny Taxwise – The Skinny on Self-Employment Taxes

Hola, my tax-conscious compadres! Penny Taxwise here, back again with another installment of tax-tacular advice for your reading pleasure. This week, I chose an answered question from another Tax Connections member – the query was one I’ve pondered myself quite a bit lately. I want you to take a look at the original question before we get into the discussion portion of the program:

What is Self-Employment Tax and is this in addition to other taxes I pay as a small business owner at the end of the year?

This question is extremely relevant to my own situation – I’ve been doing the freelance writing thing for some time now, but this past year will be the first tax cycle I’ll have officially done it full-time (pause for applause). I myself have wondered how the whole tax thing should go down for the work-at-home crowd. I guess some part of me understood that my income taxes would be separate from the self-employment taxes I’d need to pay, but I was a bit fuzzy on the specifics.

Tax Pros to the Rescue

One of the dynamite Tax Connections gurus, Gary Carter, rushed right to the rescue with a fantastic (and not confusing – whew!) answer to the question. He’s the President of GW Carter, Ltd, Certified Public Accountants in Minnesota.

According to Carter:

Self-Employment tax is Social Security and Medicare tax for self-employed individuals. The rate is 13.3% of your self-employment net income for 2012 (10.4% for Social Security tax and 2.9% for Medicare tax).

Essentially, Carter’s saying that self-employment tax is the money that would be taken out of your paycheck automatically if you worked for an outside employer. When you work for yourself, your tax liability is the same as those who are externally employed, you’re simply responsible for paying into the system on your own.

Carter continued his answer by enlightening the asker about some upcoming changes to the tax code. “Beginning in 2013,” he says, “the rate for Social Security tax will increase by 2%, so the combined rate will be 15.3%.”

He also warns that self-employed individuals should be aware that their self-employment net income is the net income shown on Schedule C of Form 1040 – and not their taxable income. That’s why a self-employed person could have no taxable income yet still owe self-employment tax.

Make sense?

Yeah, it kind of confused me too. Luckily, Carter provided an example in his answer for those of us who need a little help wrapping our brains around this info. Gotta love those TC Tax Pros! Here’s what he said: “[L]et’s say your net income on Schedule C is $27,000 in 2012, and you are married filing jointly with two dependent children. Your taxable income is zero after your 4 exemptions and the standard deduction ($27,000 – ($3,800 x 4) – $11,900), but you will owe $3,591 in Self-Employment tax.”

That illustration really hit home for me because – jackpot – he described my exact tax situation. No joke. So now I understand – even though my income taxes will be zilch, I’ll still need to pony up a few thousand to cover my Medicare and Social Security. Makes sense… I’d better start padding the ol’ savings account before the tax man comes calling.

Bracing for the Blow of a Big Tax Bill

Now that we’re clear on the semantics of self-employment taxes, let’s shift the focus to footing the bill. Many self-employed people (cough, cough… myself included) fail to save adequately for the taxes that will inevitably find them each and every year they work for themselves. That’s why implementing some sort of system to set aside money for Uncle Sam is vital to protecting your bottom line – and your biz.

Once you pay self-employment taxes for the first time, you’ll be able to figure out roughly how much you’ll owe for the upcoming year. That is, unless you expect your income to sharply rise or fall. If you’re confident that everything will indeed stay consistent, however, then you have a solid figure with which to work.

Here’s my plan. I’m opening a dedicated savings account strictly for my tax savings. I won’t allow myself easy access to the funds – in fact, I’m planning to request that my bank limit my ability to transfer money from the account to my checking, if at all possible. I’ll dump a portion of everything I earn into the account – before I deposit the remaining money into my checking. If I overestimate my tax bill a bit one year, no problem. The leftover dough will be a great cushion for the following year’s bill.

Self-employment taxes are no joke, and neither is self-employment. I’m learning that the hard way. Without a boss hanging over your shoulder barking orders or a payroll department to neatly deduct taxes from your paycheck before you see it, it’s tough to regulate yourself. That’s why it’s so important to set up systems to regulate your business behavior. No one’s gonna catch you if you fall, so you might as well build yourself a net.

Until next time, my taxpaying friends!

Making Cents Count,

Penny

Written by | Posted in Individual • North America • State And Local Tax (SALT) • Tax Policy • TaxConnections