Self-Employed and Ignorant Part 1

May 15, 2012 by Paulfs93

Hi all, the tax season is constantly on the heat up for yours truly. The topic du jour may be the self employed. This topic covers a broad swath of people, much too large to cover within its entirety, because it offers even corporations, especially S Corporations and LLCs that will be one man shops, although they incorporated for legal protection or tax advantages or both. Today we’re going to discuss individuals who are not incorporated and receive an either a 1099-Misc form for the services they perform, or checks from them clients with no 1099-Misc form. Some of these people “unknowingly self employed, ” that is, the people they are working for, in order avoiding paying half of their own payroll taxes, unemployment insurance coverage, etc. list these people as independent contractors although they are technically employees through the IRS definition.

The problem lies in the point that many people who earn their living, or even part of their living this way, still act as if they are an employee from a tax standpoint, but thinking this way is akin to standing adjacent to your toilet flushing off gobs of money. I see A significant amount of of this! Don’t do this! Unless of course you have more money than you know what to do with, and from what I’ve seen that’s not too many of us. Don’t get me wrong it’s not TOTALLY these kind of people’s fault. Their parents taught them that if they go to job everyday, do their best, they get paid every a couple weeks. Going into business for yourself is merely “hanging out your shingle, ” stamping up some business charge cards, and telling your friends and relatives that which you do. While this is wrong on many amounts of business which I’m not going to address here, but from your tax standpoint IT’S HURTING YOU, STOP IT TODAY!

EARN-PAY TAXES-SPEND vs. EARN-SPEND-PAY DUTY

The above concept, inside my mind, is THE CRITICAL DIFFERENCE relating to the self-employed, corporations, and everybody else. Understanding this concept and implementing it can also be the difference between LEGALLY spending money on your business before people pay taxes, or contributing more to your politicians to spend on things which you could care less about (like block grants to study the swamp spider in South america), or contribute more on the Social Security and Treatment system, both of that happens to be currently slated to get bankrupt, it’s only some sort of question of officially when. When you receive a 1099-Misc, you get all you earned. ALL OF IT! There’s no withholding in the federal, state, or nearby level, no 401k contributions, no unemployment insurance contributions, no union dues, WHATEVER YOU EARNED IS YOUR OWN PROPERTY. That’s the good info. Now, before you obtain too giddy, let’s discuss the BAD NEWS. While you are an employee, your employer pays half of your payroll taxes (Societal Security and Medicare). Normally this total has been 15. 3%, with people paying 7. 65% and your employer paying the other 7. 65%. It was slightly reduced 2010 with the break President Obama gave with payroll taxes and persists through 2012. Nonetheless you have to pay DOUBLE PAYROLL TAXES if you’re one-man shop. The only silver lining with this is that the IRS allows you to deduct the employer’s about half in “adjustments to income” component to the Form 1040, so you’re not “double whammied” using double payroll tax AND income tax.

THE DOUBLE WHAMMY…

As if paying double payroll income taxes wasn’t bad enough, it gets worse for any self employed and ignorant. You now have to cover income taxes on half of the remaining earnings too, minus of training course 1/2 that gets deducted, as mentioned above. Positive, you have a possibility to reduce it more there after if you file some sort of Schedule A (itemized deductions) but the Schedule An is limited if you make too much money, plus those itemized deductions will be the first things that get added back in for purposes of calculating the alternative Minimum Tax (AMT).

… GENERATE THAT POSSIBLY TRIPLE WHAMMIED

Just because there is absolutely no withholding on a 1099-Misc, does NOT mean you can’t owe it, in basic fact, if you don’t pay a quantity in estimated taxes by the end of the year (preferably quarterly), you’re going to get a small penalty assessed at the bottom of your Form 1040, that is figured on Form 2210.

IT DOESN’T OUGHT TO BE THIS WAY

First I built you up by telling you that you get to keep all to your money when you be handed a 1099-MISC or get paid directly from you people. Then I tore it all down by telling you about how you could get WHAMMIED with taxes together with penalties. So, you may ask, why in the world would anyone want to be self-employed? How do many that own a company become so financially effective? The answer is, the NON IGNORANT can usually get many tax advantages by knowing the hows, whens, wheres, whats, and whys of deductions. Successful small company people are not really overall tax savvy being a C. P. A. and an E. A., nonetheless they DO know taxes that sign up for their business VERY PROPERLY! They buy office materials, liability insurance, take company trips to exotic areas, give gifts to clients, take continuing education classes several other great perks, legally and before they provide a cent to your failing Social Security and Medicare system. But even after this they have a few additional options down in the “Adjustments to Income” area in the bottoom of the 1040. Seen to those in the financial industry as “above that line deductions, ” they are not tied to income like “below the line deductions” such as the Schedule A.

These non-ignorant small business owners have the benefits involving freedom, AND control of the amount of they pay in fees. Those that are utilized don’t have this on the market to them, those that are one-man shop and ignorant by continually not benefiting from these breaks… well, with respect to us that DO benefit from what’s being given to help us, thank you very much for being a pal and giving more than you have to, but really you shouldn’t get. Seriously you shouldn’t have, and in Part 2 of One-man shop and Ignorant we can look more in detail concerning how you move to the non-ignorant side of your aisle. Hope to see you there.

Brenna Adriano blog sites pertaining to going self employed