Hi Indies,
Here's some questions from an indie with a growing business. All his questions are already answered on my blog. This applies to lots of questions indies send in. The answers are here, just takes a little work on your part. Remember the SEARCH facility in the upper-left corner of the screen. I welcome all comments on better ways of making it easier for you to reference specific questions and topics.
To Kevin I say don't go to a tax pro knowing nothing. How will you know if the guy knows what he's talking about if you know nothing? Read-Read-Read! Start here tax pros - tax prep fees - tax returns (21) , My answers to your questions are below in red. The number indicates how many posts there are on that topic.
-- June
Hello June,
My name is Kevin, and I have been self employed since November of 2007. I started a reselling business out of my parents house in Austin,TX a few months after I graduated from college, and have watched it grow exponentially.
My business revolves around sales through eBay and my own website. In 2007 my taxes were almost nothing considering I had just started the business and recently graduated from school. In 2008 my business began to grow on a monthly basis, and my tax obligation grew with it.
I have considered finding an accountant to ask numerous questions, but since I found your site, maybe you can shed some light for me.
1) I am currently a sole proprietorship, from a tax perspective, would it make sense for me to become an LLC, incorporate, or become a corporation?
Look here business entity (21)
and here business entity -- incorporation (4)
business entity -- LLC (12)
2) Do I need to make quarterly tax payments, and if I haven't made any yet this year will I have to pay a tax penalty? In 2007 I paid less than 500 in taxes.
Look here taxes -- estimated (11)
3) Do you have any other recommendations or advice I could put to use to make my business as profitable as possible? Self-employed Tax Solutions
Thanks for your time!
Kevin
Thursday, October 30, 2008
Monday, October 27, 2008
Less Tax vs Higher Pension Contribution
June,
I am employed full-time but have been a part-time indie for the last 20 years (consulting psychologist).
My question is about my SEP IRA. One of the problems, as I see it, with a SEP IRA is that the more you deduct from your gross self-employment income, the LESS you can contribute because the allowable contribution is a percentage (20 or 25%?) of your self-employment income AFTER expense deductions.
It would seem that the less you deduct for expenses, the more you can save!
How does one crunch the numbers to see what the best way to go is?
By the way, how would you rate the SEP IRA vs the new Roth 401(k)?
Mark
Fairfax Station, VA
Dear Mark,
Good questions. You are into the "indie business mindset" way of thinking.
Let me overview here for some of my readers. The allowed contribution to any pension plan for a self-employed is limited by the net self-employed income. Therefore the more business expenses you have the less your net income and so the less you may contribute to your indie pension.
Here are some actual numbers to look at: Let's assume a 15% federal income tax and 15% SE tax. That means that deducting a $1,000 expense saves you $300 -- 30% X $1000.
In a SEP, because your self-employed income was reduced by $1000, you may contribute $200 less to your pension.
You are looking at a tax savings of $300 versus putting $200 less into your pension.
It makes more sense to take the tax savings and do one of two things:
1. Put the $300 into another kind of non-pension savings. Talk to your investment broker about what would be best.
OR
2. Change to a different kind of indie pension. There are many to choose from, and at my earliest opportunity I will write about the choices you have. Fort the interim, ask your personal tax advisor to explain your choices.
You can have ROTHs of any kind, e.g. SEP, 401-K. The younger you are and the less concerned you are about paying less tax NOW the more advantageous a ROTH.
Best,
June
I am employed full-time but have been a part-time indie for the last 20 years (consulting psychologist).
My question is about my SEP IRA. One of the problems, as I see it, with a SEP IRA is that the more you deduct from your gross self-employment income, the LESS you can contribute because the allowable contribution is a percentage (20 or 25%?) of your self-employment income AFTER expense deductions.
It would seem that the less you deduct for expenses, the more you can save!
How does one crunch the numbers to see what the best way to go is?
By the way, how would you rate the SEP IRA vs the new Roth 401(k)?
Mark
Fairfax Station, VA
Dear Mark,
Good questions. You are into the "indie business mindset" way of thinking.
Let me overview here for some of my readers. The allowed contribution to any pension plan for a self-employed is limited by the net self-employed income. Therefore the more business expenses you have the less your net income and so the less you may contribute to your indie pension.
Here are some actual numbers to look at: Let's assume a 15% federal income tax and 15% SE tax. That means that deducting a $1,000 expense saves you $300 -- 30% X $1000.
In a SEP, because your self-employed income was reduced by $1000, you may contribute $200 less to your pension.
You are looking at a tax savings of $300 versus putting $200 less into your pension.
It makes more sense to take the tax savings and do one of two things:
1. Put the $300 into another kind of non-pension savings. Talk to your investment broker about what would be best.
OR
2. Change to a different kind of indie pension. There are many to choose from, and at my earliest opportunity I will write about the choices you have. Fort the interim, ask your personal tax advisor to explain your choices.
You can have ROTHs of any kind, e.g. SEP, 401-K. The younger you are and the less concerned you are about paying less tax NOW the more advantageous a ROTH.
Best,
June
Wednesday, October 22, 2008
You must get receipts for meals.
June --
When traveling for work meals are deductible at 50% for the location and time period in question without showing receipts.
If I do photography for an organization at a place where meals and lodging are included, can one still take the meal deduction? Or does the rule, "You can't deduct what you did not pay for" hold?
And what if the meals and lodging -- and perhaps travel -- are in lieu of monetary payment?
Thank you.
Miriam
New York
Hello Miriam,
All deductible business meals -- whether while traveling or not -- are deductible at 50%. However, I think you picked up some misleading info somewhere. You must have a receipt for all business meals and entertainment.
You do not need receipts for meals while traveling if you choose to use the per diem method of deduction.
If meals are included you may not deduct the cost of meals.
If you receive meals and lodging or travel in lieu of payment, then the value of the meals, lodging and travel is income to you. You may then deduct your expenses from that income.
Best,
June
When traveling for work meals are deductible at 50% for the location and time period in question without showing receipts.
If I do photography for an organization at a place where meals and lodging are included, can one still take the meal deduction? Or does the rule, "You can't deduct what you did not pay for" hold?
And what if the meals and lodging -- and perhaps travel -- are in lieu of monetary payment?
Thank you.
Miriam
New York
Hello Miriam,
All deductible business meals -- whether while traveling or not -- are deductible at 50%. However, I think you picked up some misleading info somewhere. You must have a receipt for all business meals and entertainment.
You do not need receipts for meals while traveling if you choose to use the per diem method of deduction.
If meals are included you may not deduct the cost of meals.
If you receive meals and lodging or travel in lieu of payment, then the value of the meals, lodging and travel is income to you. You may then deduct your expenses from that income.
Best,
June
Home Office Exclusivity & Estimated Taxes
Hello,
I do admin type work for a non-profit. It is very straight forward. I send them an invoice for the time I spend doing various things, and I get a check for that amount. I get a 1099 for my taxes. I don't have expenses really. I don't travel, use up office supplies, etc.
I am finding your website helpful, but wanted clarification on one of the archived topics: Office in the home expense. I use the office in our house to do my work. My children do look at books in the office, but it is because it's the only place the bookcase fits. My husband uses the computer to check email a couple of times a week, but other than that, I am the only one that uses it frequently. Can I claim that? It is where I do my work.
Most - about 95% - of Internet use is me working. Can I claim that?
I just end up sending so much of what I make to the government. I would have to save two or 3 checks to pay the taxes in April. I don't have a steady income, so estimated payments won't work. During the summer I combine a month or two of invoices, just because it barely worked. I hope I am not rambling - sorry!
Any help is appreciated.
Thank you.
Kasey
Fort Worth, TX
Hello Kasey,
For starters, it sounds as if you are really an employee who happens to work at home. The non-profit is your employer.
But let's look at the situation as you describe it.
If your children treat your office as part of their home you may not take the entire room as a home office. You may take only the area of the room that is off-limits to the children. Keep in mind that a home office does not have to be an entire room.
If your husband comes into your office to use your computer then the office is not exclusively used for your business and so it is not a deductible office-in-home expense for you. Since you use the internet 95% for business you would be allowed to deduct 95% of its cost. If you use the computer 95% for business then you may deduct 95% of the cost of the computer.
Since money is tight think of some way for your husband to check his email elsewhere. Of course, if it's a laptop you could bring it into the kitchen for him. Or, see how much a home office would save you in taxes. It might save enough to warrant buying him a really cheap, basic computer just for emailing.
As far as estimated taxes, you might want to try this: Look at last year's tax return. If, for instance, 30% of your income went toward taxes, then, take 30% of every check and put it aside -- into a separate bank account if necessary. Then on estimated payment due dates, pay whatever is in that set-aside-account as your tax payment.
Hope that helps a little.
Best,
June
I do admin type work for a non-profit. It is very straight forward. I send them an invoice for the time I spend doing various things, and I get a check for that amount. I get a 1099 for my taxes. I don't have expenses really. I don't travel, use up office supplies, etc.
I am finding your website helpful, but wanted clarification on one of the archived topics: Office in the home expense. I use the office in our house to do my work. My children do look at books in the office, but it is because it's the only place the bookcase fits. My husband uses the computer to check email a couple of times a week, but other than that, I am the only one that uses it frequently. Can I claim that? It is where I do my work.
Most - about 95% - of Internet use is me working. Can I claim that?
I just end up sending so much of what I make to the government. I would have to save two or 3 checks to pay the taxes in April. I don't have a steady income, so estimated payments won't work. During the summer I combine a month or two of invoices, just because it barely worked. I hope I am not rambling - sorry!
Any help is appreciated.
Thank you.
Kasey
Fort Worth, TX
Hello Kasey,
For starters, it sounds as if you are really an employee who happens to work at home. The non-profit is your employer.
But let's look at the situation as you describe it.
If your children treat your office as part of their home you may not take the entire room as a home office. You may take only the area of the room that is off-limits to the children. Keep in mind that a home office does not have to be an entire room.
If your husband comes into your office to use your computer then the office is not exclusively used for your business and so it is not a deductible office-in-home expense for you. Since you use the internet 95% for business you would be allowed to deduct 95% of its cost. If you use the computer 95% for business then you may deduct 95% of the cost of the computer.
Since money is tight think of some way for your husband to check his email elsewhere. Of course, if it's a laptop you could bring it into the kitchen for him. Or, see how much a home office would save you in taxes. It might save enough to warrant buying him a really cheap, basic computer just for emailing.
As far as estimated taxes, you might want to try this: Look at last year's tax return. If, for instance, 30% of your income went toward taxes, then, take 30% of every check and put it aside -- into a separate bank account if necessary. Then on estimated payment due dates, pay whatever is in that set-aside-account as your tax payment.
Hope that helps a little.
Best,
June
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