The Tax Man Cometh Stop groaning, take the pillow off your head and check out the new tax breaks.
In many ways, April is the greatest month of the year. Crocusesbloom, robins chirp, and the crack of horsehide against hickory inbig league baseball parks can be heard throughout the land.
Uncle Sam loves April, too-but not for the same reasonsthe rest of us do. That's because April is the time when thegovernment comes knocking at your door, tax bill in hand.
For the 9 million or so U.S. homebased entrepreneurs, April canbe a stressful month. But with good planning and currentinformation, it doesn't have to be.
First, the bad news. Because you're in business foryourself, you'll be paying the employer's contribution toSocial Security as well as your own. So, instead of paying a7½ percent Social Security tax, try 15 percent.
In addition, you not only have to pay extra taxes, such as thefull FICA tax (instead of half), but you're also highlyscrutinized by the IRS. Whereas the average individual filer hasabout a 1 percent chance of being audited, small-business ownersand self-employed workers have about a 4 percent chance of beingsingled out by Uncle Sam.
New Tax Breaks
The good news is that Congress, perhaps in recognition of theswelling ranks of entrepreneurial voters, is making things a biteasier for independents.
Take health insurance. Entrepreneurs can deduct 60 percent oflast year's medical premiums-handled apart from the regularmedical deduction. The share will rise to 70 percent for 2002 andto 100 percent for 2003. And Congress may advance the schedule.
Plus, 1999 brings a new wrinkle into the health insurancefabric. If you hire your spouse as a legitimate, paid employee, youcan provide him or her with family health coverage, which will alsocover you. The cost is fully deductible as a business expense.
Another piece of good news from Washington comes in the form ofbusiness equipment deductions. Starting last year, business ownerscan now fully write off up to $19,000 of business equipmentpurchased in 1999. That's up $500 from the old limit.
Home Office Deduction
More music to your ears are changes in the home office deductionfor 1999. As recently as 1998, business owners who had offices athome but conducted most of their business elsewhere couldn'tclaim the deduction. That meant a landscaper who cut lawns all daybut kept an office to handle invoicing didn't meet IRS homeoffice standards.
That ruling changes to a significant degree this year. Under anew statute, if you use your home office for administrative ormanagement activities, you'll be able to take the deduction,even if you generate your income outside the office. A caveat: Thetaxpayer still has to show that the space is used exclusively andregularly for business and not for personal use.
Here's an example. A freelance writer has an annual incomeof $50,000 before claiming the home office deduction. If thefreelancer's home office deduction is $3,000, income afterexpenses is reduced to $47,000. Rather than being taxed on $50,000,Social Security and Medicare taxes are now based on $47,000, savingthe business owner $459.
Need More Help?
For more information on these and other tax breaks, call a taxspecialist for details or grab The IRS Tax Guide for SmallBusiness, 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 outEntrepreneur magazine's Start-Up Guides. There are morethan 50 industry-specific books on small business, each containinga section on taxes for that business.
Tax Dates
April 17: Tax deadline day
August 15: Returns are due from people who got a 4-monthextension of the April 15 deadline. It's also the last day torequest an additional 2 months.
September 15: Deadline for paying third installment of 2000estimated tax
October 16: Last deadline for 1999 returns
January 15, 2001: Deadline for final installment of 2000estimated tax
Brian O'Connell is a Framingham, Massachusetts-basedfreelance business writer. His most recent book, B2B.com(Bob Adams Media), is available this September. His earlierbooks, Generation E: How Young Entrepreneurs are Changing theCorporate Landscape (Entrepreneur Press) and The 401(k)Millionaire (Random House/Villard), are available in bookstores.A frequent contributor to many national business magazines, he canbe reached at Bwrite111@aol.com.
