OLT TAX CORNER ~ Business/ Self-Employment Income

OLT TAX CORNER ~ Business/ Self-Employment Income

OLT TAX CORNER ~ Business/ Self-Employment Income ONLINE TAXES



OLT TAX CORNER ~ Business/ Self-Employment Income

Business/ Self-Employment Income FAQ
  1. Can you explain who is considered self-employed?
  2. What is considered "other income" on Schedule C?
  3. What is the Standard Meal Allowance?
  4. Can the entire acquisition cost of a computer that I purchased for my business be deducted as a business expense or do I have to use depreciation?
  5. How can I distinguish between a business and a hobby?
  6. How do I know if I have to file quarterly individual estimated tax payments?
  7. Do self-employment taxes need to be paid quarterly or yearly?
  8. When are the quarterly estimated tax payments due?
  9. Most of my income is from farming. Are there any special provisions related to estimated tax payments for farmers?
  10. What are the standard mileage rates?


Can you explain who is considered self-employed?
Self-employed individuals are independent contractors, not employees.
Self-employed individuals control the methods and means of performing services for others. For businesses owned by just one person, self-employment income, expenses, and profits are reported on Schedule C (or C-EZ), Profit or Loss From Business. Self-employment profit increases the income that is subject to tax. The self-employment tax is calculated on Schedule SE, Self-Employment Tax. The self-employment tax is reported on Form 1040, U.S. Individual Income Tax Return. The self-employment tax increases the total tax. One-half of the self-employment tax reduces the income that is subject to tax.
Employees:
  • work for employers who direct or control when, where, and how the work is performed.
  • report their earnings on Form W-2, Wage and Tax Statement.
Independent contractors:
  • perform services for others.
  • are self-employed.
  • are their own bosses.
  • report their earnings on Form 1099-MISC.
Miscellaneous Income:
  • Report self-employment income, expenses, and profit or loss on Schedule C (or C-EZ), Profit or Loss From Business.
  • Calculate the self-employment tax on Schedule SE, Self-Employment Tax.
  • Report the self-employment tax on Form 1040, U.S. Individual Income Tax Return.
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What is considered "other income" on Schedule C?
Report on the "other income" line amounts from finance reserve income, scrap sales, bad debts you recovered, interest (such as on notes and accounts receivable), state gasoline or fuel tax refunds you got in a prior year, credit for federal tax paid on gasoline or other fuels claimed on your prior year return, prizes and awards related to your trade or business, tips, and other kinds of miscellaneous business income. Include amounts you received in your trade or business as shown on Form 1099-PATR.
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What is the Standard Meal Allowance?
Generally, you can use the "standard meal allowance" method as an alternative to the actual cost method. It allows you to use a set amount for your daily meals and incidental expenses (M&IE) instead of keeping records of your actual costs. The set amount varies depending on where and when you travel. If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel.
You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses.
You cannot use the standard meal allowance when traveling for medical or charitable purposes.
Most major cities and many other localities in the US are designated as high-cost areas, qualifying for higher meal allowances. These rates can be found in IRS Publication 1542.
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Can the entire acquisition cost of a computer that I purchased for my business be deducted as a business expense or do I have to use depreciation?
The entire acquisition cost of a computer purchased for business use can be expensed under Code section 179 in the first year if qualified, or depreciated over a 5-year recovery period. Under section 179, you can elect to recover all or part of the cost of certain qualifying property up to a dollar limit by deducting it in the year you place the property in service. You can elect to expense the cost of qualifying property instead of recovering the cost by taking depreciation. To claim the expense in the first year, the property must be used more than 50% for business use, and meet the other requirements for expensing. One of those requirements is that the total cost of qualifying property you can deduct after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Any cost not deductible in one year under section 179 because of the business income limit can be carried to the next year.
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How can I distinguish between a business and a hobby?
It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take.
You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended to produce tax losses for the investors.
The limit on not-for-profit losses applies to individuals, partnerships, estate trusts, and S corporations. For additional information on these entities, refer to business structures. It does not apply to corporations other than S corporations.
In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
  1. You carry on the activity in a business-like manner,
  2. The time and effort you put into the activity indicate you intend to make it profitable,
  3. You depend on income from the activity for your livelihood,
  4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
  5. You change your methods of operation in an attempt to improve profitability,
  6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
  7. You were successful in making a profit in similar activities in the past,
  8. The activity makes a profit in some years and the amount of profit it makes, and
  9. You can expect to make a future profit from the appreciation of the assets used in the activity.
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How do I know if I have to file quarterly individual estimated tax payments?
Estimated tax payments can be used to pay Federal income tax, self-employment tax, and household employment tax. To estimate if you need to pay tax on income not subject to withholding or on other income from which not enough tax is withheld, you need to calculate if the total tax you'll owe on your annual income tax return will be covered by the amount of tax you have already had either:
  • withheld from wages and other payments, or
  • paid in earlier estimated payments for the year, or
  • credited to your account from adjustments or overpayments to previously filed returns.
Generally, you should make estimated tax payments if you will owe tax of $1,000 or more, after withholding and credits, and the total amount of tax withheld and your credits will be less than the smaller of:
  • 90% of the tax to be shown on your current tax return, or
  • 100% of the tax shown on your prior year's tax return if your prior year's tax return covered all 12 months of the year. However, if your prior year's adjusted gross income exceeded $150,000, or $75,000 if you filed a separate return from your spouse, then you must pay 110% instead of 100% of last year's tax. (Note: the percentages change depending on the tax year. Refer to Publication 505, Tax Withholding and Estimated Tax.
Estimated tax requirements are different for farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules and about estimated tax in general. Get Form 1040-ES (PDF), Estimated Tax for Individuals, to help you figure your estimated tax liability.
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Do self-employment taxes need to be paid quarterly or yearly?
Self-employment tax is paid by making quarterly estimated tax payments which include both income tax and social security tax.
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When are the quarterly estimated tax payments due?
Your first estimated tax payment is usually due the 15th of April. You may pay the entire year's estimated tax at that time, or you may pay your estimated tax in four payments. The four payments are due April 17th, June 15th, September 15, and January 15th of the following year.
If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday.
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Most of my income is from farming. Are there any special provisions related to estimated tax payments for farmers?
If you have income from farming, you may be able to avoid making estimated tax payments by filing your return and paying the entire tax due on or before March 1 of the year your return is due. If March 1 falls on a weekend or legal holiday, you have until the next business day to file and pay the tax. This estimated tax rule generally applies if at least 2/3 of your total gross income is from farming this year or previous year. Refer to IRS Publication 225, Farmer's Tax Guide, and IRS Tax Topic 416, Farming and Fishing Income, for additional information.
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What are the standard mileage rates?
Starting January 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is:
  • 53.5 cents per mile for business miles driven
  • 17 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations
January 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is:
  • 54 cents per mile for business miles driven
  • 19 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations
January 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is:
  • 57.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations
January 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is:
  • 56 cents per mile for business miles driven
  • 23.5 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

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