The Tax Man Cometh
In many ways, April is the greatest month of the year. Crocuses bloom, robins chirp, and the crack of horsehide against hickory in big league baseball parks can be heard throughout the land.
Uncle Sam loves April, too-but not for the same reasons the rest of us do. That's because April is the time when the government comes knocking at your door, tax bill in hand.
For the 9 million or so U.S. homebased entrepreneurs, April can be a stressful month. But with good planning and current information, it doesn't have to be.
First, the bad news. Because you're in business for yourself, you'll be paying the employer's contribution to Social Security as well as your own. So, instead of paying a 7Â½ percent Social Security tax, try 15 percent.
In addition, you not only have to pay extra taxes, such as the full FICA tax (instead of half), but you're also highly scrutinized by the IRS. Whereas the average individual filer has about a 1 percent chance of being audited, small-business owners and self-employed workers have about a 4 percent chance of being singled out by Uncle Sam.
New Tax Breaks
The good news is that Congress, perhaps in recognition of the swelling ranks of entrepreneurial voters, is making things a bit easier for independents.
Take health insurance. Entrepreneurs can deduct 60 percent of last year's medical premiums-handled apart from the regular medical deduction. The share will rise to 70 percent for 2002 and to 100 percent for 2003. And Congress may advance the schedule.
Plus, 1999 brings a new wrinkle into the health insurance fabric. If you hire your spouse as a legitimate, paid employee, you can provide him or her with family health coverage, which will also cover you. The cost is fully deductible as a business expense.
Another piece of good news from Washington comes in the form of business equipment deductions. Starting last year, business owners can now fully write off up to $19,000 of business equipment purchased in 1999. That's up $500 from the old limit.
Home Office Deduction
More music to your ears are changes in the home office deduction for 1999. As recently as 1998, business owners who had offices at home but conducted most of their business elsewhere couldn't claim the deduction. That meant a landscaper who cut lawns all day but kept an office to handle invoicing didn't meet IRS home office standards.
That ruling changes to a significant degree this year. Under a new statute, if you use your home office for administrative or management activities, you'll be able to take the deduction, even if you generate your income outside the office. A caveat: The taxpayer still has to show that the space is used exclusively and regularly for business and not for personal use.
Here's an example. A freelance writer has an annual income of $50,000 before claiming the home office deduction. If the freelancer's home office deduction is $3,000, income after expenses is reduced to $47,000. Rather than being taxed on $50,000, Social Security and Medicare taxes are now based on $47,000, saving the business owner $459.
Need More Help?
For more information on these and other tax breaks, call a tax specialist for details or grab The IRS Tax Guide for Small Business, a free handbook. You can order by calling (800) TAX- FORM, or download it at www.irs.ustreas.gov.
You can also find help through the SBA, or check out Entrepreneur magazine's Start-Up Guides. There are more than 50 industry-specific books on small business, each containing a section on taxes for that business.
April 17: Tax deadline day
August 15: Returns are due from people who got a 4-month extension of the April 15 deadline. It's also the last day to request an additional 2 months.
September 15: Deadline for paying third installment of 2000 estimated tax
October 16: Last deadline for 1999 returns
January 15, 2001: Deadline for final installment of 2000 estimated tax
Brian O'Connell is a Framingham, Massachusetts-based freelance business writer. His most recent book, B2B.com (Bob Adams Media), is available this September. His earlier books, Generation E: How Young Entrepreneurs are Changing the Corporate Landscape (Entrepreneur Press) and The 401(k) Millionaire (Random House/Villard), are available in bookstores. A frequent contributor to many national business magazines, he can be reached at Bwrite111@aol.com.
For reprints and licensing questions, click here.