Grossbach Zaino & Associates, CPA's, PC

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Tax Concerns for the Self-employed


If you’re in business for yourself, you know how challenging it can be to run your business and keep on top of your tax situation. Here’s a refresher on the tax rules you need to be aware of if you’re a self-employed sole proprietor or are thinking of becoming one.


Income Taxes


As you probably know, sole proprietors do not file a separate federal income-tax return for the business. Instead, they summarize their business income and expenses on Schedule C of their personal income-tax returns.


Be sure to keep complete records of your income and expenses. Deducting all your ordinary and necessary business expenses will help minimize your tax liability. If you have losses, these are generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses, and activities for which you were not “at risk.”


Self-employment (SE) Taxes


Any self-employed person who has net earnings of at least $400 from the business is subject to SE taxes on those earnings. SE taxes generally track the Social Security and Medicare taxes paid by employees and their employers and are partially tax deductible.


For 2016, the SE tax rates are:


  • Social Security – 12.4% of the first $118,500 of net SE earnings


  • Medicare – 2.9% on all net SE earnings, plus an additional 0.9% on earnings in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases


Quarterly Estimated Tax Payments


Your net SE income will be taxable whether or not you withdraw cash from your business account. Moreover, you may be subject to penalties if you fail to make appropriate quarterly estimated tax payments.


Home Office Deduction


If you work out of your home, you may be able to deduct a portion of the costs incurred to maintain your home. You also may be able to deduct commuting expenses incurred to travel from your home office to another work location.


Health Insurance Costs


When tax law requirements are met, you may deduct your health insurance premiums as a trade or business expense, including premiums paid for your spouse, dependents, and children under the age of 27.


Retirement Plan


If you don’t already have a tax-favored retirement plan, you may want to consider establishing one. Contributions to the plan would be tax deductible, within certain tax law limits. Types of retirement plans available to sole proprietors include solo 401(k) and simplified employee pension (SEP) plans.

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Know Your Tax Talk

Credits, deductions, withholding, oh my! Tax vocabulary can be confusing. Here are explanations for some common terms that you should know.


Adjusted gross income (AGI). Calculated by taking all of your gross income from taxable sources (wages, dividends, interest, capital gains, etc.) minus specified deductions that are allowed in arriving at AGI, such as qualified retirement plan contributions, alimony payments, etc.


Deductions. Expenses that are subtracted from your AGI. You can take either the standard deduction, an inflation-adjusted fixed amount, or you can itemize deductions by listing specific expenses, such as real property taxes, qualifying mortgage interest, and charitable contributions.


Exemptions. An amount you can deduct for yourself, your spouse (on a joint return), and each dependent.


Taxable income. What’s left after your gross income is reduced by allowable adjustments, deductions, and exemptions.


Credits. Subtracted directly from your tax liability to reduce the amount of tax you owe.