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
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."
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.
Employees have taxes taken out of every paychecka 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."
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