Do You Owe Self-Employment Tax?

Did you work as a sole proprietor or independent contractor in 2016? If you earned more than $400 during 2016 from the work you did, you may owe self-employment tax. That’s true no matter what your age – even if you’re receiving social security benefits.

 
The tax is assessed on your earnings from self-employment. In this context, “earnings” generally means your self-employed income after deducting expenses incurred while operating your business. If you have multiple businesses, you combine the net income and losses. For your 2016 return, the self-employment tax rate is 15.3% on the first $118,500 that you earned.

 
What happens when you earn social security wages or tips from an employer and also have a side business? Your wages count toward the taxable base. Depending on how much you earn as an employee, your self-employment income may be subject to part or all of the tax.

 
You can pay self-employment tax on a quarterly basis as part of your estimated tax payments. One half of the total self-employment tax that you pay during the year is deductible on your income tax return, and you don’t have to itemize to claim the deduction.

 
Are you new to self-employment? Give us a call. We’re happy to help you make smart tax decisions.

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#TaxTipTuesday- Did you know you may be able to deduct miles driven for purposes other than business?

 

Deduct all of the mileage you’re entitled to — but not more

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

 

 

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

 

 

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

 

 

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

You don’t have to itemize to claim these deductions on your 2016 return

 

 

Can’t itemize? You can still claim some expenses on your 2016 federal income tax return. Here’s how you can benefit.

 

 

 

 

* IRA and HSA contributions

If you made a contribution to your traditional IRA for 2016, or if you plan to make a 2016 contribution by April 18, 2017, you may qualify to deduct up to the maximum contribution amount of $5,500 ($6,500 if you’re age 50 or older). Income limitations apply in some cases, and you can’t deduct contributions to Roth IRAs.

Health Savings Accounts (HSAs) are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow on a tax-deferred basis, and you’re allowed to withdraw money in the account tax-free to pay for your unreimbursed medical expenses. For 2016, you can deduct up to the contribution limit of $3,350 if you’re filing single and $6,750 when you’re married filing jointly. You may also be able to deduct an additional $1,000 if you were age 55 or older and made a catch-up contribution to your HSA.

* Student loan interest and tuition fees

Deduct up to $2,500 of interest on student loans for yourself, your spouse, and your dependents on your 2016 return. For 2016 returns, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.

* Self-employment deductions

If you’re self-employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.

* Other deductions

Alimony you pay, certain moving expenses, and early savings withdrawal penalties are also deductible on your 2016 return, even if you don’t itemize. Teachers can deduct up to $250 for classroom supplies purchased out-of-pocket in 2016.

Contact our office for more information on these and other costs you may be able to deduct on your 2016 tax return.

Avoid hiring mistakes in your start-up

Staffing errors can spell disaster for your start-up. Here are three to watch out for.

 
1. Staffing the firm with friends and family. While this strategy may work in some circumstances, hiring pals and relatives often spells trouble. For one thing, friends and family members often expect – even subconsciously – to be treated differently from other employees. A double standard, whether real or perceived, can hurt morale and productivity. As a general rule, focus hiring decisions solely on the needs of your firm and applicant qualifications.

 
2. Trusting in a handshake. Spell out employee arrangements in writing. This can be as simple as drafting employee offer letters that cover compensation, rights to intellectual property, and bonus arrangements. Employee handbooks are also a good way to spell out the responsibilities of your firm and staff.

 
3. Bringing in a partner for the wrong reasons. Downside risks of bringing in a partner include surrendering a portion of your company and control over important management decisions to someone else. Before selling part of your company, ask yourself what the partner will contribute besides money. Can you find other ways to fill gaps in your team? Choosing wisely can help you avoid ending up in the business equivalent of divorce court.

 
For assistance with issues facing your start-up business, give us a call.

Higher Self-Employment Taxes Coming in 2017

Did you know the national average wage index went up? You might have missed the news, but it’s likely you will notice one impact: higher self-employment taxes.
How are the two related? The index is used to calculate the social security wage base, which is the amount of income subject to the 12.4% social security portion of the self-employment tax. When the index goes up, the wage base does too, and more of your income is taxed.
The wage base does not affect the 2.9% Medicare portion of the self-employment tax. Medicare tax is assessed on all net income from self-employment, including amounts above the base. The 0.9% Additional Medicare Tax is not affected either. That tax applies to your compensation in excess of $250,000 when you’re married filing jointly ($200,000 when you’re single).
For 2016, the wage base was $118,500. For 2017, the wage base will be $127,200. That means an additional $8,700 of the net profit from your business is subject to social security tax in 2017. The effect is an increase in the amount you pay, even though the total self-employment tax rate of 15.3% remains unchanged.
Please contact us for more information.

#TaxTipTuesday-#Self-employed? Here’s how to meet your employment tax obligations and perhaps even save tax.

In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax.

The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income.

Additional 0.9% Medicare tax

Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).

If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus.

Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income.

If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments.

Deductions for the self-employed

For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.)

As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks.

For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us.

No need to itemize to claim these deductions

 

Are you part of the approximately 68% of taxpayers who IRS statistics say claim the standard deduction instead of itemizing? If so, you can still deduct some expenses on your 2015 federal income tax return.
● Individual retirement account (IRA) contributions – For 2015, you may qualify to deduct up to $5,500 in contributions to a traditional IRA. That increases to $6,500 if you’re age 50 or older. Income limitations may apply in some cases. The same limits apply to Roth IRA contributions, which are not deductible.
● Health Savings Account (HSA) contributions – HSAs are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow tax-free, and you withdraw the money tax-free to pay unreimbursed medical expenses. The HSA contribution limit for 2015 is $3,350 for individuals and $6,650 for families. You can contribute an additional $1,000 when you’re age 55 and older.
● Student loan interest and tuition fees – Deduct up to $2,500 of interest on student loans for yourself, your spouse, and your dependents. For 2015, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.
● Self-employment deductions – If you’re self-employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.
● Other deductions – Don’t overlook deductions for alimony you pay, certain moving expenses, and early savings withdrawal penalties. Educators can deduct up to $250 for classroom supplies purchased in 2015.
Contact our office for more information on these and other deductions you may be entitled to claim on your 2015 return.

Deduct home office expenses-if you’re eligible

Today it’s becoming more common to work from home. But just because you have a home office space doesn’t mean you can deduct expenses associated with it.

Eligibility requirements
If you’re an employee, your use of your home office must be for your employer’s convenience, not just your own. If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.
Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with that space.
A valuable break
If you are eligible, the home office deduction can be a valuable tax break. You may be able to deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space.
Or you can take the simpler “safe harbor” deduction in lieu of calculating, allocating and substantiating actual expenses. The safe harbor deduction is capped at $1,500 per year, based on $5 per square foot up to a maximum of 300 square feet.

More considerations
For employees, home office expenses are a miscellaneous itemized deduction. This means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your adjusted gross income (AGI).
If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income.
Finally, be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction, contact us for more information.

 

 

Three Helpful Tips As You Begin Preparing To File Your 2015 Income Taxes

1. Check whether your children need to file a 2015 tax return. They’ll need to file if wages exceeded $6,300, self-employment income was over $400, or investment income exceeded $1,050. When income includes both wages and investment income, other thresholds apply.

 
2. Consider whether you’ll contribute to a Roth or traditional IRA. Since you have until April 18 to make a 2015 contribution (April 19 if you live in Maine or Massachusetts), you can schedule an amount to set aside from each paycheck for the next few months. The maximum contribution for 2015 is the lesser of your earned income for the year or $5,500 ($6,500 when you’re age 50 or older). Be sure to tell your bank or other trustee that these 2016 contributions are for 2015 until you reach the 2015 limit. You can then deduct these 2016 amounts on your 2015 tax return for a quicker tax benefit.

 
3. Do you need to file a gift tax return? For 2015, you may need to file a return if you gave gifts totaling more than $14,000 to someone other than your spouse. Some gifts, such as direct payments of medical bills or tuition, are not subject to gift tax. Gift tax returns are due at the same time as your federal income tax return.
Call us for more tips on getting ready for filing your 2015 income taxes.

Be aware of these tax deadlines

 

 

A new year means tax return filing season has arrived once again. Among the tax deadlines you may be required to meet in the next few months are the following:

 

 
● January 15 – Due date for the fourth and final installment of 2015 estimated tax for individuals (unless you file your 2015 return and pay any balance due by February 1).
● February 1 – Employers must furnish 2015 W-2 statements to employees. Payers must furnish 1099 information statements to payees. (The deadline for Form 1099-B and consolidated statements is February 16.)
● February 1 – Employers must generally file 2015 federal unemployment tax returns and pay any tax due.
● February 29 – Payers must file information returns (except Forms 1095-B and 1095-C) with the IRS. (March 31 is the deadline if filing electronically.)
● February 29 – Employers must send W-2 copies to the Social Security Administration. (March 31 is the deadline if filing electronically.)
● March 31 – Large employers must furnish Form 1095-C to employees.
● May 31 – Forms 1095-B and 1095-C due to IRS. (June 30 is the deadline if filing electronically.)