I won’t speculate on the new Obama tax cuts that are coming.  I’ve mentioned those before… so I’ll just wait until they are final before diving into that lovely pot of goodies.

Let’s clarify a little self-employed tax code, shall we?

  • File a Schedule C with your tax return if you are a sole-proprietor (file a separate schedule C for each business you are in),
  • If you pay yourself out of the proprietorship, that is not a deductible expense (contrary to popular belief),
  • Health insurance for a self-employed individual is not deducted on the Schedule C – it is deducted on the front of the 1040 for the individual,
  • Deduct your Business Use of Home if you work out of your house and do not have another office somewhere else (use Form 8829) – to my knowledge it does not increase your potential for an audit (that is a tall tale),
  • You need to show a profit in at least three out of five years on your Schedule C or the IRS may consider your activity to be a hobby (which means you can’t deduct losses anymore),
  • You have to pay self-employment tax on your profit (which is 15.3% of your profit), so if you are making a lot of money you may need to consider switching to an S Corp status (see your tax expert on what is considered a lot of money),
  • You (as a self-employed individual) have to claim all income received as a self employed individual,
  • You (as a self-employed individual) do not have to pay self-employment tax unless your net earnings (i.e. profit) equals or is more than $400,
  • You (as a self-employed individual) have to report 1099s to anyone you paid money to that exceeds $600 (different rule that the two above).

So now you know.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.