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Self-Employment Rules & Regulations…
In This Issue:
# Self-Employment: Rules and Regulations
Self-Employment-Rules and Regulations:
Here at Meditec, we get so many questions about conducting a business and whether to sign up with a potential employer as an employee, a contractor or a subcontractor, we thought we would provide a good overview of all that is involved.
Much of the information is available in the HomeBizBook available from this website and at the end of the newsletter, a special offer for you to get your copy.
What is an employee? (W-2)
The usual definition for tax purposes is an individual hired on who is paid by the hour, week or month, with taxes (Medicare, Social Security, personal tax, [federal, state and local]) withheld by the employer and paid over to the appropriate entity. The income is reported on a W-2 form. A 1040 of whatever version is used to file taxes.
Statutory employment: (W-2)
Statutory employment is also reported on W-2 forms. They are typically outside employees or home workers. Social Security and Medicare are withheld from their pay. Statutory employees report their wages, income, and allowable expenses on Schedule C (self-employment form) and the net income is reported on Form 1040. Statutory employees are not liable for self-employment tax because their employers must treat them as employees for social security tax purposes.
Contractors and subcontractors: (1099)
This group of people work are self-employed. They are responsible for their own taxes, including Social Security and Medicare. Their income is reported on Schedule C. The net after the income and expenses is the amount used to calculate the self-employment tax. Some of these people receive a 1099 form for their work effort (typical for transcriptionists).
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 a self-employed individual. You are an independent contractor if the person for whom you perform services has only the right to control or direct the result of your work, not what will be done or how it will be done (this subject is fraught with interpretative arguments relating to home-based workers).
A good example of the controversy between those who employ contractors (and subcontractors) is found in the February 2008 issue of the Kiplinger Letter, “The IRS is after firms that isclassify workers as contractors. It is unveiling an electronic matching system to identify companies that issue 1099s with payments of at least $25,000 to five or more workers who do not have any other sources of earned income. That will trigger audits this year to determine if the contractors should be paid as employees.” Given the trend toward utilizing independent contractors for provision of services, industry business owners and transcription service providers would be well advised to research and ensure compliance in this area. To learn more, visit:
www.kiplinger.com
www.irs.gov
Tips and Requirements for Self employment:
Identification Numbers:
You must have a taxpayer identification number to operate a business. This is generally the social security number, or an individual taxpayer number. However if one has employees an Employer Identification Number is required (and is usually good to have anyway).
A Taxpayer Identification Number (TIN) is an identification number used by the Internal Revenue Service (IRS) in the administration of tax laws. It is issued either by the Social Security Administration (SSA) or by the IRS. A Social Security number (SSN) is issued by the SSA whereas all other TINs are issued by the IRS.
Social Security Number SSN
Employer Identification Number EIN
Individual Taxpayer Identification Number ITIN
A Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service that always begins with the number 9 and has a 7 or 8 in the fourth digit, example 9XX-7X-XXXX.. These are issued to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA).
How to Get an EIN number:
On-Line: The Internet EIN application is the preferred method for customers to apply for and obtain an EIN. Once the application is completed, the information is validated during the online session, and an EIN is issued immediately. The online application process is available for all entities whose principal business, office or agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories. The principal officer, general partner, grantor, owner, trustor etc. must have a valid Taxpayer Identification Number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number) in order to use the online application.
By phone: Taxpayers can obtain an EIN immediately by calling the Business & Specialty Tax Line at (800) 829-4933. The hours of operation are 7:00 a.m. – 10:00 p.m. local time, Monday through Friday. An assistor takes the information, assigns the EIN, and provides the number to an authorized individual over the telephone.
Filing Requirements for the Self-Employed:
As a self-employed individual, you may be responsible for completing multiple tax forms, depending on your type of business. Self-employed individuals, sole-proprietors, independent contractors and persons who have net earnings of $400 or more are required to pay self-employment tax by filing Schedule SE (self-employment) attached to their Form 1040.
As a self-employed individual (someone who owns an unincorporated business) or an independent contractor, you are required to report income and expenses on a Schedule C. Your net profit may be subject to SE tax. You must file a completed Schedule SE attached to your Form 1040, U.S. Individual Income Tax Return.
As a member of a partnership that carries on a trade or business, or as a member of a Limited Liability Company (LLC) that chooses to be treated as a partnership, your distributive share of its income or loss from that trade or business is included in your net earning from self-employment. These entities must report the business income and expenses on Form 1065, U.S. Return of Partnership Income, along with a Schedule K-1 reporting each partner’s net income or loss. You must file a completed Schedule SE attached to your Form 1040, U.S. Individual Income Tax Return.
Operating a Business:
Learn about the various responsibilities associated with operating your own business. You will find many topics, such as: types of business taxes that may apply, how to structure retirement plans for your employees, deducting the cost of running your business, and much more at the IRS website (and your state government website).
What Expenses can be Deducted?
# Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
It is important to separate business expenses from the following expenses:
Cost of Goods Sold includes:
# Capital Expenses
# Certain Personal Expenses
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold:
Cost of Goods Sold Expenses:
# Cost of product or raw materials, including freight
# Storage
# Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
# Factory overhead (if you do it at home, that’s your factory)
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
Capital Expenses:You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
Capitalized Assets:
# Business start-up cost (filing fees, cost to organize your business entity, etc.)
# Business assets (you can amortize [depreciate] start up costs).
# Improvements
Personal versus Business Expenses:
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.
Business Use of Your Home:
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
Business Use of Your Car:
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Types of Business Expenses:
# Employees’ Pay – the pay you give your employees for the services they perform for your business.
# Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’, retirement.
# Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
# Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities (don’t forget credit cards).
# Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
# Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
# Equipment (some must be amortized)
# Supplies
# Telephone and Internet services
As you can see, it is important to be informed about how to conduct your business and, if pertinent, how to contract for work from others.
