Taxes complicated for self-employed

by Christine Ballew-Gonzales

SBJ Contributing Writer

Small-business and work-at-home arrangements are growing as fast in the Ozarks as they are across the country. Working for yourself and setting your own rules and work hours has distinct benefits, but those who work for themselves must also monitor their tax situation if they don't want a surprise next April 15.

People who are used to filling out a withholding form and leaving tax collection to Uncle Sam will need to shift their thinking, as the full responsibility for paying taxes in belongs to the self-employed, according to Jenise Jackson, of Jackson and Jackson.

Many newly self-employed people are not aware that, in addition to federal and state income tax, they must also pay self-employment tax, which is 15.3 percent of net income.

"That's where they usually get into trouble, by neglecting to pay self-employment taxes," Jackson said.

Paying self-employment taxes is a fairly easy process, Jackson said. Those who are self-employed use IRS Form 1040 ES to pay their estimated taxes quarterly. Those who err on the side of caution and overpay will get the overage back without interest. Those who underpay must pay what they owe at the end of the year, plus applicable penalties, according to Jackson. "I've seen some self-employed people come in owing a lot of money at the end of the year," she said.

IRS Form 1040 ES can be obtained at the IRS office or by calling 800-829-1040.

Those making the switch from employeeship to self-employment might be well-served by a visit to a certified public accountant, who can advise them on the tax situations that being self-employed creates. One important decision that should be made with the help of a CPA is the type of business entity the self-employed individual chooses.

"They want to be sure they are in the right entity, whether that is a schedule C filer, corporation, partnership, etc.," Jackson said.

Another important tax consideration for self-employed people is using the tax deductions available to them to their greatest advantage, and, again, that's where a CPA can help. In the past several years, many who use home offices have been leery of taking a home business deduction, fearful that it would draw an audit.

"As long as you've got your documentation, it shouldn't be a problem," Jackson said. "Also, the home-business deduction laws for 1999 have been relaxed."

Ed Samek, of Samek, Fritz and Co., said he does not believe that taking the home-business (also referred to as business-use-of-home) deduction alone increases the likelihood of an audit.

"Most home office deductions are not that significant," Samek said. "To cause an audit, there should be other red flags. (The deduction) alone should not cause the IRS to look at your return."

The home-office deduction, an important tax component for self-employed people, is now more within reach than ever, Samek said, the result of new home office deduction laws for 1999.

For example, in years past, the home-office deduction could only be taken if the home office was the principle place of business. Therefore, a plumber who uses a home office for scheduling, record-keeping and other administrative tasks could not claim that as a deduction, even though a considerable amount of business was conducted from the home office.

"Now the home office deduction can be taken if significant administrative or record-keeping duties are conducted there," Samek said. "This has opened the door for a lot of self-employed people to take this deduction who weren't entitled to it before."

But there are other deductions that can be considered. "Self-employed people should at least look into whether they can employ their children in their business," Samek said. Employing children, whose employeeship must be for a legitimate position verified via paperwork, could be beneficial to those who are self-employed.

"If you have the right situation and the children can provide some service to the business, that can yield some tax benefits," Samek said.

Springfield CPA Jack Weimer said there is a common mistake he sometimes sees in those who choose self-employment. "Failing to plan for the tax consequences of being self-employed can become a problem," Weimer said. "Clients who become self-employed need to look at their options in terms of what business entity is right for them and their deductions."

Weimer added that those who are self-employed should avoid going it alone when it comes to taxes. "They really need a CPA to address these issues," he said.

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