Self-employment tax questions

[polksalet]

Well, I am now self-employed working as a contractor under the direction of an LS. How does this affect my taxes? I plan on dumping all of my income into equipment for my own business which will hopefully start up November 2007. I know that all of my expenses from now on can be deducted but what about the wages I earned as an employee for the first 8 months of this year?

 

Let's say I earned 50k the first 8 months of the year and the next four months I will earn 30k. Can I spend 80k on equipment this year and deduct it all? Let's say my wife makes 100k. Can I spend some of her earnings over mine and deduct that as well?

 

I was once self-employed but stayed perpetually broke so this was never a consideration but now I have more money than I know what to do with and it is a different thing. I am considering adding an office onto my house but I do not know how that would work as far as a deduction.

 

Any thoughts or recommended readings?

[nuke'em ttg]

don't forget advertising & entertainment........

[theeohiostate]

You can buy anything business related you want and depressiate it 100% this year. It doesn't matter you worked partially as a employee of someone else. I realize you may want to invest in deductible equiptment, but i'd FIRST max out any and all SEP and Simple IRA's you can. That's money in your pocket. I think you can put up to 40K (tax deffered) per year in a SEP (accountants confirm). Also i'd recommend you setting up your wife or child on your payroll, and give them a job to do, then you can match and max out a SEP or Simple IRA for them as well.

 

Good luck

 

 

Also if you have an office in your house, be sure to track your phone, heating and cooling records for deductions as well.

Edited September 23, 2006 by theeohiostate

[BYoder]

Is your business income going to be reported on Schedule C or have you incorporated? I would highly suggest talking to a CPA and looking into becoming an LLC or an S-Corporation.

 

Using your example, you cannot buy equipment and expense it all in the same year. You will have to depreciate it over a number of years (the length depends on what is purchased). One exception is the section 179 deduction which allows you to expense equipment in the year it is purchased, but the section 179 expense deduction cannot be more than your business income so it will not allow you to offset those W2 wages. I can explain more if you would like.

 

If your business has a loss at the end of the year then that loss will offset your W2 wages and lower your AGI and taxable income. There is no limit on the amount of loss that can be reported as long as you can prove that it is real. If you and your wife make $150,000, from your example, and the business loses $200,000 then you will essentially pay no tax this year (you would get a refund for whatever was withheld from your paycheck) and will have around a $50,000 Net Operating Loss (NOL). In this case you would be able to carry the NOL back to prior years and get a refund.

 

If you are filing as a Schedule C and the business has a net income for the year you are going to have to pay self-employment tax which is currently 15.3%. You will also pay income tax on the net income from the business.

 

Like I said before, I would suggest talking to your CPA about an LLC or S-Corp for the added protection of being incorporated and there are some tax advantages of each.

 

A couple of other things to consider:

1) If you have an office in your house you can use it as a deduction as long as it is solely used for the business. This will allow you to deduct a portion of the cost of you home as well as a portion of your mortgage interest, utilities, insurance, etc.

2) Look into starting some type of retirement plan through the business for years when you have income (SEP IRA, SIMPLE IRA, etc.). This will allow you to lower your taxable income while still keeping 100% of the money (Although you can't get to it right away)

3) Meals & Entertainment are deductible, but only 50% of what you spend.

 

I hope I didn't confuse you too much.

 

now I have more money than I know what to do with

Let me know if this is a problem and I will pm you my address to send a check

[BYoder]

I think you can put up to 40K (tax deffered) per year in a SEP (accountants confirm).

 

For 2006 the deduction is the lesser of 25% of the business income or $44,000

[polksalet]

thanks for the help guys.