Are You Self-Employed?

Generally, you are self-employed if you:

• Operate as an independent contractor
• Are the sole proprietor of a business or you practice a trade
• In some way or another are in business for yourself

Things to know:
Up to 100 percent of medical insurance costs paid by self-employed individuals, covering themselves, their spouse, and their dependents, may be deducted as an adjustment to income on Form 1040, U.S. Individual Income Tax Return. The deduction is subtracted directly from total income and applies whether or not a taxpayer itemizes.

If you use your vehicle for business purposes, you may be able to deduct expenses associated with such use. To do this, you must keep track of actual expenses or use the standard mileage rate.
You may be entitled to a tax break if you are operating a business from your home.
– Is this part of your home used regularly and exclusively in conjunction with your business or work?
– Is that place your principal place of business?
– Is it where customers and clients meet with you?
– Is it where you store product samples?
– Is it where you administer or manage your trade or business?
If so, you may be able to deduct certain depreciation and operating expenses. The same might apply to a separate structure.

You may recover your investment in certain business-related properties (such as equipment, a vehicle, or a building) through the use of depreciation. Through depreciation, you will deduct some of your cost on each year's return. If you do not take the depreciation, you lose it and when you sell the property, the IRS calculates the basis as though you had taken the deduction each year. If you have not claimed or have under-claimed depreciation deductions on property placed in service in prior years, you may be able to fully recover all allowable depreciation by filing amended returns for the years in question or by changing your accounting method.
Up to $100,000 of certain tangible business property may be deducted in the year it was put in service rather than using the depreciation method (section 179 expensing). The maximum amount that may be deducted for qualifying enterprise zone, renewal community, and Liberty Zone property is $135,000.
Your employees' wages and salaries are deductible if paid during the tax year for work directly related to your business and if the pay is reasonable, considering the nature of the work. You must be able to verify that the payments were made for duties actually performed. There are various types of withholding for different types of employees. Specific forms must be used for reporting payments made to employees.
You may be able to deduct expenses for a leased asset such as a car or computer used in your business. If it is not used solely for the business purposes, you may deduct only the percentage of use that applies to your business or work.

Business tax credits can reduce your tax liability. There is a credit for providing access to the disabled and a work opportunity credit for providing work for members of groups with special employment needs or higher unemployment rates.

Freelancers who qualify to use Schedule C, Profit or Loss from Business, can report their deductible business expenses on that form. If these deductions were taken on Schedule A, Itemized Deductions, they would be subject to the 2% of adjusted gross income limitation.

Costs that you have in setting up an active trade or business, or investigating the possibility of creating or acquiring a business, are business start-up costs. These costs are amortized rather than depreciated. Franchise fees, goodwill, and customer-based intangibles are also amortizable.

If you are an accrual-basis taxpayer and you have been unable to collect money owed you or your trade or business, you may be able to deduct it, provided you have a tax basis in the debt. A cash-basis taxpayer normally does not report income until they receive payment so they cannot deduct a bad debt.

The tax implications of a self-employed individual are different from those of an ordinary wage earner. Each situation may present a number of complex tax questions. Here are some of the things you need to take into consideration:
– How much Social Security and Medicare taxes, FUTA taxes and Workers' Compensation Insurance will you pay?
– Will you have more than one trade or business?
– What if your attempt to operate a business fails?
– Should your financial calculations be based on a calendar year or a fiscal year?

Starting January 1, 2004, certain individuals who are covered by a high deductible health insurance plan may be able to contribute to a Health Savings Account (HSA). With this account, contributions are deducted from your gross income when calculating adjusted gross income, which means you do not need to itemize deductions to take advantage of this deduction. Additionally, distributions are not taxable if used for qualified medical expenses. The first time a HSA can impact your tax return is in tax-year 2004.