Self Employment Tax Issues

turbotax

People often get so swept up in the first exciting year of starting their own business, going freelance or contracting that they forget some of the more mundane, but nevertheless important changes that self-employment will bring. Along with a renewed passion for your career and control over your own destiny and potentially far greater financial rewards, there are also a number of downsides and financial hurdles to setting out on your own.

Self Employment Tax will be one of those hurdles. Self-Employment Tax is a tax that you were never required to pay as an employee, but essentially it is the self-employment version of the FICA (Federal Insurance Contributions Act) tax that is used to pay for social security and medicare and it comes out of your net earnings from your self employment. Back when you were employed by a company you probably never gave a moment’s thought to this payment because your employer would have been paying half of it, approximately 7.65% each. But now you are classified as self-employed, whether you are a sole proprietor or an independent contractor, you have to pay the full 15.3% levy yourself on your tax return. As long as you earn over $433 per annum, you must pay 15.3%. And once you reach $106,800 you then pay 2.9% for every dollar after that. The tax itself is split into two parts. Social Security receive 12.4% and Medicare receive 2.9%.

So how do you know if you need to pay it? Basically, if you’re self-employed in any way, you pay the tax. It is levied on net earnings from your business. Whether you file a Schedule C (Profit or Loss from Business), a Schedule F or a Schedule E with income from a partnership then you’re required to file a Schedule SE and pay the tax. However, it relates to income from your job and earnings, not from investments so investment income is not subject to Self-Employment Tax. Rents and royalties, dividends, interest and capital gains are therefore not taxed.

The next thing you need to consider is that when you were employed your employer would take care of paying this. Now the responsibility lies with you. Unfortunately going freelance means more paperwork and more responsibility. You need to calculate your Self-Employment tax on Schedule SE and enter this figure into the “Other Taxes” section of the 1040 form. This is so the IRS can differentiate between income tax and the SE tax. You will need to make estimates quarterly on your tax obligation in April June, September and January and if you don’t pay or they aren’t enough you could face penalties and interest.

There are, however, some ways to reduce Self – Employment tax. Firstly, you can charge your own business a rental charge for using your property. This income that you get from rent is not part of your self-employment and therefore is free from Self-Employment tax. Secondly, when calculating Self Employment tax you are permitted to reduce your income by 7.65% before you have to apply the tax rate. So if your net self-employed income is $100,ooo this is what you write on your 1040 for income tax. But on your Schedule SE the taxable amount is $100,000 less $7650 which comes to 92,350. This saves paying 15.3% tax on $7650, making a saving of $1170.

Alex Simmonds is a journalist and copywriter living in the UK. He can currently be found writing a daily blog on contracting and  home-working for The Bedouin Group., a contractor portal.

Enhanced by Zemanta

Inheritance Planning Takes Careful Consideration

turbotax

When someone inherits a sum of money from a loved one, there is a certain level of healthy stress that is created. It can be exciting to know that you’re about to receive an amount of money, no matter how large it is, but it’s important to contain the stress and use it for good reasons. This energy should be put toward inheritance planning in order to ensure that only smart moves are made with the money. If you have a list in your mind of what you’ll spend it on, it helps to write it down and evaluate the significance of your financial planning ideas. Seeking out professional advice is the best thing to do at this point to make sure that the financial decisions you’re making are smart.

If the inheritance doesn’t come with a specific purpose set up by the deceased, there should be careful consideration for it. Sometimes loved ones want to make sure that the money is spent wisely so they assign certain expenses, such as education, mortgages, or business purposes to the money so that their heir’s future will be secure. Inheritance planning is still required for this type of inheritance because the details need to be ironed out.

A financial adviser or attorney will be able to point out the best ways to invest the money if that’s what you decide to do. Inheritance tax planner may also help out a lot so try to find one. Reaching the best conclusion will only come about if you carry out inheritance planning with a professional and follow their advice. They may suggest investing the money in something that will pay off even more in the future, whether it’s a business venture or other investment. That’s a move that you loved one would be proud of and definitely falls in the category of why it was handed down to you in the first place.

Simple and Clear Debt Solutions

turbotax

A downward turn in the economy may cause a job loss and more expense in relation to income, even for the best of money managers. It can be especially difficult to handle your finances in these economically challenging times. It seems at times the downturn is unending, resulting in mounting debt that is not preventable. There are various resources, however, that may help you to regain a more firm financial footing within the worst of times, even enabling your transforming debt into wealth. You may end up with a more solid financial future if you make clear debt solutions an internal part of your personal financial picture.

Many factors may affect your financial situation, and an income loss can certainly influence the way in which you are able to pay off debt, and may even cause more accumulation of debt. It may seem that the root cause of the situation is a lack of money, at first glance. The real probem, however, may actually be how the income you have is spent and appropriated. Seeking professional help with debt elimination may enable you to find a way to regain financial control, regardless of what has caused the debt, such as reckless spending or income loss. An abundance of information and many programs exist that promote very effective clear debt solutions. A review of the requirements of the various programs will help you to find effective, affordable help from a reputable company.

A careful online search of the variety of programs available for debt solutions will assist you in your choice of professionals to help in your situation. Make a side-by-side comparison of the different programs so that you may choose the one that best suits your needs. A note of caution is to keep in mind there is no quick fix to becoming free of debt, and you need to steer clear of anybody that promises to erase your debt just by having you pay a fee to their company. A reputable company, financial adviser or organization will review your situation in an honest assessment, and advise you on the proper course of action. By heeding their advice and staying in contact with those to whom you owe money, you will effectively gain control of your financial situation again, and become debt-free.

Back Taxes and the Move to Settle Them

turbotax

It is very much normal for people to move into the process to settle tax debt to make their records straight. With a good standing history of paying taxes, you get better chances of higher loan approvals. To settle IRS tax debt, you need to get an installment agreement with the local government unit. This contract is to act as a process of paying monthly returns to the concerned agency to pay the liabilities. Basically, the agreement is defined as an arrangement between the government and the taxpayer over a certain period of time.

The creation of this method to settle tax debt will prevent the agency from going into enforced collection actions. If the concerned taxpayer is unable to construct such an agreement plan between the agency and the taxpayer, the IRS will have the grounds to hold the accounts of the person. In some cases, the persons’ wages will also be levied until the debts are paid in full. As a matter of fact, the records of the taxpayer remain in current and updated histories. When the person is unable to meet it, then most probably, his records and bank accounts will be placed on hold. The installment agreement signifies the intent of the person concerned to pay the obligations. Interests and penalties that have been accrued will still be forced as part of the obligations to be paid.

People who want to settle tax debt can have this option as a method of making their records current. In fact, with the recent conditions of the American economy being in turmoil, the IRS will ensure that you get the best deal possible. In a sense, if you are someone who is more than willing to pay the obligations, then most likely the IRS will be a little lenient on you. The IRS is also offering taxpayers, who miss out on a payment for the installment, an opportunity to make up for it. If you want to be part of the installment program, then you would have to declare the returns that are past due. Defaults on payments will eventually be pardoned but will still be part of the total obligations of the payer.