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Taxes and Your Home Business

Taxes are one of the most complicated aspects of running a home business. How do you avoid having the IRS classify your business as a hobby? How do you figure your estimated taxes? How do you qualify for a home office deduction? Those and may more questions are answered in Will Work from Home.

June Freeman of Vicksburg, MS says, "The author's give some very good information for the person who is looking to work from home. This advice can be used for virtually any business you are looking to start or if you are just starting to telecommute from your regular job. I like the fact that the author's take you through what you need to know and how to go about doing it step-by-step."

Excerpt:

Avoid Having the IRS Classify Your Business as a Hobby

You're a great cook and occasionally cater parties for your friends, but you keep buying expensive kitchen equipment to do it. Is your activity a business or a hobby? If your catering business isn't incorporated and loses money year after year, you could be in danger of having the IRS classify your hard work as a hobby. If this happens, you lose valuable business deductions. You can't use your losses to offset other income or carry them to the next year. End result — you'll owe more income tax.

The difference between a hobby and a business in the eyes of the IRS is whether you have a profit motive. Bow do you prove that your intentions are monetary, and you're not just indulging your passion and writing off the expenses?

• Earn a profit (even a small one counts) for three out of five con secutive years. You may want to put off buying new equipment until after January 1, if it means the difference between a profit and a loss.

• Operate in a businesslike manner: Have a business license, open a business bank account, print business cards and letterhead, install a business phone, and join the chamber of commerce.

• Keep a log of your business activity, contacts made,letters sent to clients — anything that would show you are trying to earn a profit.

• If you don't earn a profit in three out of five years, you may still be able to convince the IRS that you are running a business, but it will be harder.

...

Separate Business and Personal Finances

Whether your work is part-time or full-time, open a business checking account, preferably one with an ATM debit⁄credit card attached. Choose a bank that you trust with a full line of business services. Banking online can save you time.

Deposit business income and pay for business expenses with your business account. This will make it easier to track your business activity for record keeping purposes and streamline your tax filing. Transfer money to your personal account when you need it. Not only is a business account a wise accounting move, but psychologically, it helps to keep your business and personal hats separate.

...

As a self-employed worker, you've said good-bye to corporate W-2s and short tax forms. The checks you get from clients or customers will have no income tax deducted. Furthermore, you'll be responsible for paying your full share of self-employment taxes (Social Security and Medicare), not just half, as when you worked. You'll have to determine what you owe the federal, state, and local governments. This is when those accurate records you've been keeping will pay dividends.

As a self-employed worker, you'll need to pay income tax, self-employment tax, and estimated taxes unless you earn very little from your business. A good ruie of thumb is to save a third of every heck you receive to pay taxes. You may owe a little more or considerably less depending on what other income or deductions you lave, but in any case, saving a third of your income should eliminate a bill that you can t afford to pay on April 15.

The forms you file will depend on your business organization and types of deductions you take. Check with the IRS, and click he "Small Business and Self-Employed One-Stop Resource." The way to save money on taxes is to know and take all of the business deductions you are allowed.

As a sole proprietor, you'll be filing a Schedule C with your 1040, and a Schedule SE to figure your self-employment tax, whether you're filing alone, married, or as head of your household.

...

Estimated Taxes

Employees have taxes taken out of every paycheck—a pay-as-you-go plan. When you're self-employed, the government expects you to pay your tax bill quarterly if you expect to owe more than $1000 in federal tax at the end of the year. Write these dates on your calendar now — April 15, June 15, September 15, and January 15, and be prepared to mail in a 1040-ES with your estimated tax before lose dates. To avoid penalties, you need to pay at least 90 percent what you owe annually, or 100 percent of the tax you paid the previous year.

You can figure your estimated taxes for the next year when you file your annual taxes — simply take the tax you owed and divide by four. When your income goes up, increase your estimated taxes accordingly to save a high tax bill at the end of the year. To learn rnore, see IRS Publication 505, "Tax Withholding and Estimated Tax."

Home Office Deduction

One of the great advantages of working at home is the home office deduction — if you qualify. Read IRS Publication 587, "Business Use of Your Home." To qualify, the IRS says that your home office must be used exclusively (no sharing the office with a guest room, example) and regularly for business and that it must be your principal place of business. The deduction is limited to the amount of business income. To calculate what percentage of your home, apartment, or condo you use for business, you may either count he number of rooms (if they are of about equal size) and divide by the total number or rooms in your home to get a percentage, or you in measure the square footage of your office and divide by the total square footage of your home. Some of the related deductions rou. may be eligible to take include the business percentage of your mortgage interest, rent, insurance, real estate tax, utilities, repairs, and home depreciation.

Another reader says, "This book is extraordinary and practical. Its form of easy reading, along with the complete explanations of the many at-home working possibilities makes this book invaluable to those seeking to work at home. Whether tranfering the current employment or starting a new job, this book will provide clear guidelines on how and where to start, who to address and how, along with creative ideas that will allow the expansion and exploration of further exposure of the services that can be provided.

"From the first page to the last, the possibilities of working from home are endless! This book, also, includes short stories shared by people who have established their at-home business, some success stories from people who have read the book, attended presentations by the authors, and even have spoken personally to the authors. Want to work from home, not withstanding the reason? This is the book to get you started." Click here for more information.

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