Frequently Asked Questions
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Q&A: Business Tips
I have my own small business. I’m the only employee and a sole proprietor. I am a little bit confused about the difference between self-employment tax and small business tax. Is there a difference and which one do I have to pay?
The difference between self-employment tax and small business tax depends on the structure of your business. If you are a sole proprietor and you are the only employee, in most cases there is essentially no difference between self-employment tax and small business tax. Any income that you make from your business is simply self-employment or miscellaneous income. You are required to file estimated quarterly taxes on that income four times per year, and failure to do so may result in collection of late fees or penalties. If your business was structured as an S-corporation or a C-corporation, and/or if you had employees, then there would be some significant differences between self employment tax and small business tax as corporations have a different tax structure and employers are generally required to pay a portion of their employee’s social security taxes, as well as to withhold FICA and other taxes from employee paychecks. In your situation, it would be best to speak with a lawyer and perhaps an account that has experience with self-employment or small business taxes to understand your legal obligations and avoid any potential IRS penalties.
Tax law business is generally brisk because there are so many laws surrounding business and the tax deductions and write-offs associated with them. The IRS offers business owners quite a few small business tax deductions as long as you know where to find them. The following are some write-0ffs and the rules regarding them. Start up costs deductions include a $5,000 write off for organizational costs that can be taken for the first year of business. They apply for expenses incurred after October 22, 2004. Before that date the rules differ. Expenses not deducted can be amortized over a 180 month period of time beginning at the time you began your business. Items that can be deducted or amortized include: market research, employee training, legal advising, advertising, business-related travel, and other costs.
are clearly spelled out under the IRS rules though they are usually the most scrutinized of deductions, so be sure and keep accurate records. Vehicle deductions can be taken either by the mile or for actual expenses in gas and maintenance. Newly purchased vehicles can also be deducted in one single deduction or by depreciation.
that the IRS allows have strict guidelines attached, but generally include employee educational expenses as long as the courses they take maintain or improve job-related skills, or are necessary for the employee to maintain his/her current position. In some cases transportation to and from class can be deducted.
are deductible as long as they are non-reimbursed funds. It is recommended that you log your expenses and receipts. Airfare, lodging even dry cleaning can be deducted as well as half of any business meals.
can be taken within reason. A person can deduct up to 50% of entertainment costs as long as they are for unreimbursed business meetings. The entertainment must take place within a "clear business setting" for example at a conference, and must precede or follow a business meeting.
must be deducted over a three year period as they generally serve a business for more than a single year. Advertising costs can be deducted as long as they are directly related to the business, and are taken as miscellaneous expenses.
are usually taken on personal forms for Partnerships, and S corporations and limited liability companies and are passed through members like the organization's income. C corporations, however, are entitled to corporate deductions.
Q&A: Personal Tips
Generally, anyone earning income should consider filing a return. However, filing requirements depend on a combination of circumstances, including filing status, income and age. For those just starting out, one of the biggest determining factors will be whether they are claimed as a dependent by their parents. This means taxpayers with nearly identical circumstances might have different requirements. For example, a single 18-year-old who is claimed as a dependent and earned $9,000 in wages and tips from part-time jobs must file a tax return because this worker’s earned income is more than the standard deduction, which is $5,800 for a single filer in 2011. Yet, if this person was not claimed as a dependent, filing would not be required because gross income did not exceed $9,500, which is the 2011 filing threshold for someone who files a return as a single individual. The filing threshold is determined by adding the personal exemption and the standard deduction for the applicable filing status.
An amended tax return can be filed any time of year to claim overlooked credits and deductions, include omitted income, and correct the number of dependents claimed. To claim a refund, the original or amended return must generally be filed three years from the original due date of the return. For example, an amended return for tax year 2008 must be filed by April 17, 2012.
The deadline for filing federal individual tax returns is typically April 15. This year, the April filing due date is the 17th instead of the 15th due to the observance of Emancipation Day (April 15) in the District of Columbia on Monday, April 16. This is also the deadline to request an automatic six-month extension to file, generally allowing taxpayers until October 15 to submit a return without a late-filing penalty. To avoid late payment penalties and interest, any taxes owed must be paid by the April deadline.