J.K. Lasser's Guide to Self-Employment

Taxes, Strategies, and Money-Saving Tips for Schedule C Filers

Barbara Weltman

• Publisher: Wiley
• Year: 2019
• ISBN:
  9781119669586
• Edition: 2
• Topic: Personal Development
• Subtopic: Personal Finance

What every self-employed person needs to know about their taxes!

If you're self-employed, chances are the majority of your time is spent finding new customers or clients, servicing existing ones, and handling each and every aspect of your business. Freelancers, independent contractors, gig economy participants, and other individuals working for themselves need to be aware of their responsibilities when it comes to paying their taxes. Even if you have an accountant or use tax preparation software, you may not be aware of all the deductions and credits you are entitled to. That's where the experts at J.K. Lasser come in.

The second edition of J.K. Lasser's Guide to Self-Employment helps you file your taxes correctly, accurately, and on time. Using clear, jargon-free language, this bestselling guide explains the legal and financial implications of self-employment and shows you how to keep as much of your hard-earned money as legally possible. You will learn the essentials of tax reporting and see what types of valuable tax-saving deductions and credits you can claim. Fully updated to reflect changes in the tax code, this new edition features practical examples, easy-to-use worksheets, real-world tips, expert advice, and much more. A must-have resource for anyone who fills out a Schedule C at tax time, this book:

• Offers effective strategies for reducing your tax bill and increasing your cash flow
• Presents a detailed overview of the Schedule C that explains when, where, and what to file
• Explains how to protect yourself on a tax-advantaged basis with insurance, health coverage, and retirement plans
• Features advice on growing your business through technology and education programs
• Provides new and updated information on the qualified business income deduction, getting certified for government contracts, recent legislation that protects freelancers, and more

Don't let being a solopreneur and filing your taxes be a source of stress and anxiety for you and your business. J.K. Lasser's Guide to Self-Employment: Taxes, Strategies, and Money-Saving Tips for Schedule C Filers is here to help.

PART 1
Self-Employment Basics

CHAPTER 1
Being Self-Employed and On Your Own

1. What Does Self-Employment Mean?
2. Legal Consequences of Self-Employment
3. Practical Issues in Self-Employment
4. Tax Terminology
5. Being 1099ed
6. What's Ahead

Being self-employed is an awesome thing. You control your destiny and your earning potential is limitless. You can set your hours, subject to the demands of the project or activity you're working on. If you're an employee satisfied with your job, you can supplement your income with a side hustle. And, as a self-employed individual—full or part time—you can achieve a work–life balance that enables you to attend to your other interests and responsibilities. Be a mompreneur or dadpreneur. Care for an elderly parent. Take time to train for a marathon. Travel.

Of course, you have many obligations that come along with being self-employed. Whether your business makes or loses money, you have to report your income and expenses to the federal government if you are otherwise required to file a tax return. Depending on the state you reside in, you'll also have to report your business activities to your state.

In order to report your income and expenses, you need to understand how being self-employed affects your taxes. If you are just starting out in business and formerly were an employee, things are very different as a self-employed individual. Instead of receiving a W-2 from your employer telling you exactly what you must report as income for the year, it's now up to you to track what flows in and out of your business coffers so you can report this at tax time. You may receive 1099s from businesses for which you perform services, but these forms may not tell the whole story of your revenue for the year.

You also must become familiar with tax terminology and rules that affect your tax responsibilities. And you should think about matters beyond taxes that become your responsibility as a business owner, including your health coverage (Chapter 8), retirement savings (Chapter 8), and insurance protection.

What Does Self-Employment Mean?

Solopreneur, independent contractor, platform worker, direct seller of skills, freelancer, consultant—whatever term you apply to yourself, you are a self-employed person if you have not formed a corporation for your business activities. If you have no co-owners, then you are automatically treated for tax purposes as a sole proprietor and are required to file Schedule C with your personal federal income tax return, Form 1040. If you are age 65 or older, you can file Form 1040-SR instead of Form 1040. If so, then attach a Schedule C to this return.

Self-employed farmers file Schedule F; that is not discussed in this book even though many of the deductions and strategies in this book apply to farmers. Suppose you set up a limited liability company (LLC) to achieve personal liability protection (explained later). If you are the only owner (technically called a member), then you, too, file Schedule C unless you take steps to be taxed in another manner.

Being self-employed means that you are taxed on the net result of your efforts for the year, regardless of what you have left in the bank, what you spend on your personal needs, or what you reinvest in your business.

Example

If the revenue you take in is $78,000 and your deductible expenses are $22,000, your net income (essentially your profit) is $56,000. You pay federal income tax on $56,000, regardless of whether you've withdrawn $56,000 from your business bank account, spent it on your family, or used it to purchase realty for your business.

Strategies for Your Living Expenses

If you're like most self-employed individuals, you need money from your business to pay your personal rent or mortgage, buy food, make car payments, have a subscription to Netflix, take a trip once in a while, and pay other personal expenses. You can take out as little or as much money from the business as you wish for this purpose. Your use of business funds for personal expenses has no impact on taxation. You can't deduct the business's payments of your personal expenses. The amount of money you take from the business (often referred to as a draw) is entirely up to you. It is based on what the business can afford and what you need, rather than on any tax consideration.

You'll probably want to do a budget for your personal needs as well as your business expenses. This will help you figure the amount to take from your business bank account each week or month, depending on how you want to arrange withdrawals.

If you have a significant other with whom you share living expenses, factor in contributions toward household expenses from this person. During the period in which you are just starting your self-employed business, the other person may need to bear a greater share of expenses until your business activities start to bear fruit. Or you may need to live with a parent or someone else willing to put you up. Discuss your personal financial situation to make sure the person you live with is supportive, not only in the time you devote to your business, but also for your financial needs.

Greater IRS Scrutiny

Being self-employed and filing Schedule C puts you under the IRS's microscope. Audit rates for Schedule C filers are higher than for other individuals because the IRS believes that self-employed individuals have a greater opportunity to underreport income, overstate deductions, and fail to pay self-employment tax (this tax is covered in Chapter 9).

If you have a loss on a Schedule C but also have significant other income from a job or investments, you risk being questioned about whether your activities are really a business or are merely a hobby (see Chapter 4).

At the other extreme, the better you do in your business, statistics show the greater the likelihood you will be audited, as shown in Table 1.1.

IRS Action

If the IRS believes you have underreported your income, it can reconstruct income using bank deposits and other methods. You can, of course, contest this IRS action by appealing within the IRS or by going to court, which is a timely and usually expensive endeavor.

Take this real-life situation: An enterprising couple owned a number of businesses, including a trucking business that the husband ran and a daycare business that the wife ran. His business reported gross receipts on his Schedule C of $8,000; her Schedule C showed a profit of $6,000. The IRS found $151,564 in taxable deposits, including $72,125 in cash, into the trucking business account and $11,168 in deposits, including $6,410 in cash, into the daycare business account. Once the IRS questioned their income, the burden was on them to show they properly reported all their income, something they failed to do. So the IRS, with the Tax Court's approval, increased the income from their ...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Preface
• Introduction
• Part 1 Self-Employment Basics
• Part 2 Reporting Income and Expenses
• Part 3 Strategies for Your Business
• End User License Agreement