Tax Tips for Self-employed Individuals

If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed.  Here are some things you should know about self-employment taxes and other important matters:

If you are self-employed you generally have to pay Self-employment Tax which is social security and Medicare. But here is where you must be careful–as self-employed you are now both the employer and the employee so you have to pay both halves of social security and Medicare!  And these are in addition to the regular federal and state income taxes you would pay on your profit–your total taxes on profit add up to sometimes startling amounts.

If you are self-employed you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you may be penalized for underpayment at the end of the tax year.

You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

 

Making Work Pay 2010 Tax Credit

Target Audience: Form 1040 filers—Individual Income Tax Return

 

Important Facts about the Making Work Pay Credit  

Many working taxpayers are eligible for the Making Work Pay Tax Credit in 2010. The credit is based on earned income and is claimed on your 2010 tax return when you file your taxes in 2011.

Here are some things the IRS wants you to know about this tax credit to ensure you receive the entire amount for which you are eligible:

• The Making Work Pay Credit provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.
• Most workers received the benefit of the Making Work Pay Credit through larger paychecks, reflecting reduced federal income tax withholding during 2010.
• You cannot take the credit if your modified adjusted gross income is $95,000 for individuals or $190,000 if married filing jointly or more, you can be claimed as a dependent on someone else return, you do not have a valid social security number or you are a nonresident alien.

 

How to Pay Your Federal Taxes Electronically—FREE!

Target Audience: Those who have to make ANY kind of payment to the IRS

 

A Secure Way to Pay All Your Federal Taxes

EFTPS, the Electronic Federal Tax Payment System, is a tax payment system provided free by the U.S. Department of Treasury. Pay federal taxes electronically via the Internet or phone 24/7. Visit EFTPS to enroll.

Businesses and Individuals can pay all their federal taxes using EFTPS. Individuals can pay their quarterly 1040ES estimated taxes electronically using EFTPS, and they can make payments weekly, monthly, or quarterly. Both business and individual payments can be scheduled in advance.

 

A Secure Government Web Site

EFTPS via the Internet is a secure government web site that allows users to make federal tax payments. Every user must have a secure Internet browser with 128-bit encryption in order to access the site. To log on to the system, an enrolled user must be authenticated with three pieces of unique information: Taxpayer Identification Number (EIN or SSN), EFTPS Personal Identification Number (PIN) and an Internet Password. The combination of these three pieces of identification adds to the security of the site and the privacy of taxpayer data.

 

Convenience at Your Fingertips

EFTPS offers you the convenience and flexibility of making your tax payments via the Internet or phone. By 8:00 p.m.(ET) at least one calendar day in advance of the due date, you access EFTPS directly to report your tax information. You will instruct  EFTPS to move the funds from your account to the Treasury’s account for payment of your federal taxes. Funds will not move from your account until the date you indicate. You receive an immediate acknowledgement of your payment instructions, and your bank statement will confirm the payment was made.  

You can initiate your tax payment 24/7. As an added convenience,  EFTPS allows taxpayers to schedule tax payments in advance. Businesses can schedule payments up to 120 days in advance of their tax due date. Individuals can schedule payments up to 365 days in advance of their tax due date. EFTPS will automatically make your payments for you on the due date you indicate. Scheduled payments can be changed or cancelled up to 2 business days in advance of the scheduled payment date.

You can use EFTPS to make all your federal tax payments, including income, employment, estimated and excise taxes.

 

FTPS Enrollment 

To use EFTPS you must first enroll.  To enroll, or for more information online, visit  EFTPS or to receive an enrollment form.

 

Four Tax Tips about Tip Income

Target Audience: Those who receive tips and employers whose employees receive tips.

If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes. Here are four things the IRS wants you to know about tip income:

• Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes. The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to tax.
• Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip–splitting arrangement with fellow employees.
• Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.
• Keep a running daily log of your tip income. You may use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income.

 

Education Tax Credits

TAX CREDITS TO HELP PAY HIGHER EDUCATION COSTS

There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents.  These are:

American Opportunity Credit

Lifetime Learning Credit

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both.  You may choose to claim only one of the credits in a single tax year.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis.  

Key facts about the two programs:

The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

 

Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

Please call us if would like assistance with this.

Use Tax

USE TAX

 (Something you didn’t think you wanted to know

 but absolutely must!)

 

Target audience: Everyone

Use Tax is essentially the same as Sales Tax and has been part of Michigan tax law for many years.  Think of Use Tax as the Sales Tax you didn’t pay but should have.  Both taxes are the same 6% rate.  Altogether, you are required to follow the Michigan Sales Tax rules no matter from whom or where you buy something.  As you read this and begin to think this is insane, then you are reading it correctly!

Recently the State of Michigan has been paying a lot more attention to this as another revenue source (especially as it is already a Michigan tax law) and has stepped up its auditing of both companies and individuals for compliance. 

Being out of compliance is not a pretty picture and may be downright ugly!  By the time the auditors go through their formula and extrapolate it over four to ten years, the tax plus penalties and interest add up really fast.

It works like this:

• If you go into a Michigan retail store (or their website) and purchase something subject to Michigan Sales Tax, you will pay Sales Tax at the time of your purchase.  At this point everything is fine and you are done. 
• Assume instead you purchase the identical item from an internet or catalogue company (e.g. Dell) who does charge Michigan Sales Tax on website and phone orders. In this example, the Sales Tax has been paid when you purchased the product and no further action or tax is required on your part.
• If instead you purchase the identical item from an internet or catalogue company (e.g. Amazon.com) who does not charge Sales Tax, you will have to pay Use Tax to Michigan because you didn’t pay Sales Tax at the time of your purchase.  In this example you have to self-compute what the Sales Tax should have been and pay this additional amount to the State of Michigan yourself.

But it gets worse!

• If you make your purchase while out of state and their Sales Tax is less (say 4%) than Michigan’s, you owe the difference of 2% Use Tax to Michigan.  Sorry, but it doesn’t work the other way around!
• If you make your purchase out of the country (yes, Canada too!) and bring the item back to Michigan, you have to compute the Michigan Sales Tax and pay it as Use Tax.

Of course, these are the general rules and certain specialized industries have their own unique rules. 

The mechanics for tracking, recording and paying this differ based on whether you are an individual/joint or business taxpayer as well as your type of business.

If you are using any kind of bookkeeping/accounting software, there is an easy method of accomplishing this.

Please call us for additional assistance as it applies

specifically to you.

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