Self-employed taxpayers are those who freelance, own their own business, or work on contract. Self-employed individuals have certain tax requirements that they must meet. If you are self-employed, you should be aware of these requirements when you file your federal income tax return. The IRS offers six different pieces of advice about how to correctly file self-employment income.
- Now what income is considered self-employment income. If you receive payment for side jobs or part time work that is contacted, you may have self-employment income. This income can be supplemental to your regular salary as an employee of another business.
- Self-employed taxpayers have to file a schedule C or C-EZ along with a form 1040. A schedule C-EZ is available provided expenses are less than $5000 and other criteria is met.
- You have to pay self-employment tax along with income tax. You can use the schedule FE, Self-Employment Tax to determine how much you owe and file it with your form 1040. Self-Employment tax covers your portion of Social Security and Medicare taxes.
- You may have to pay estimated taxes throughout the year in quarterly installments. You can owe a penalty if you haven’t paid enough in taxes.
- If you have business expenses, you may be able to deduct them provided they meet the standard of being ordinary and necessary. Expenses have to be common and accepted in the industry in which you work.
- In most cases, expenses are deducted in the same year in which they were incurred, however some expenses can be capitalized on, which extends the deduction on number of tax years.
The IRS isn’t always out to get you, despite what Hollywood movies want you to thing. If you owe taxes, and aren’t able to pay the entire amount in a single lump sum, the IRS will work with you to make payment arrangements. It’s important to note that any back taxes owed or past due amounts will decrease the amount of refund you may be expecting. Thankfully, the Treasury Offset Program settles debts by using either all or a portion of your federal tax refund, making it easier to get ahead of your debt.
If you plan on using your refund to offset any state or federal debts you have, be aware of the next five points:
- The Department of Treasury’s Bureau of the Fiscal Service (BFS) runs the Treasury Offset Program.
- The types of debts that can be paid with a refund offset include state income taxes, state-owed unemployment compensation, delinquent student loans, child and parental support.
- You will be notified through the mail in a statement that documents your refund amount, the portion which was used to pay the debt, and the agency, including contact information, which received the offset.
- If you dispute the offset, you need to handle it with the agency directly, and not the IRS. The IRS doesn’t handle disputes for offset payments.
- If you file jointly with your spouse, who is completely responsible themselves for the debt, you may file Form 8379, Injured Spouse Allocation to receive any portion of the offset you are entitled to.
The IRS can’t collect health care related individual shared responsibility payments using liens or levies. However, if you owe a payment, they can offset the liability using your refund.
Sometimes, depending on income, you may owe more money to Medicare. This is known as the additional Medicare tax, which is assessed at a 9% tax rate. For those who owe, tax time can be simpler if you’re aware of the following:
Income threshold: your income, including Medicare wages, Self-Employment income and railroad retirement compensation, has to exceed certain thresholds before the tax kicks in. All of your income is added together including regular and Self-Employment income in order to calculate the tax, and any loss from Self-Employment is not factored in. See Form 8959, Additional Medicare Tax, for more information.
Filing status: your filing status determines that income threshold. For example, those filing married filing jointly, will combine both spouses’ wages and income, and then compare it to the threshold amounts.
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single: $200,000
- Head of household: $200,000
- Qualifying widow(er): $200,000
Employer responsibility: if you work for an employer, it is their responsibility to withhold any additional Medicare taxes if you earn more than $200,000 per year. If you are self-employed, you can determine whether you owe when you calculate your estimated taxes. You may have to pay a penalty if you didn’t have enough withheld or did not pay enough.
Form 8959: file Form 8959 along with your regular tax return if you owe the tax. You can report the amount you owe employer withheld on this form as well.
Sometimes, you may find yourself having to travel for work purposes. If you are not self-employed, and you work for a company or business, you may incur expenses while traveling. While it is possible to recoup your expenses by taking a tax deduction, you may find it more pertinent to seek reimbursement from your employer.
Expenses that are considered deductible are those incurred while you are outside of your main area of business for work related purposes. Such expenses include:
- Hotel or motel costs
- 50% of the amount you spend on meals and business related entertainment
- Transportation such as local shuttles and taxis once you arrive at the destination
- Amounts incurred from the actual traveling portion of the trip (back and forth to and from destination)
According to the IRS, the classification for business trip is one in which more away from the main area in which you conduct business for significant period of time. It also relates to your intention to stay absent from your tax home or a predetermined amount of time. If you are away for a period of time in which you must sleep, the trip may meet IRS standards for business travel.
Traveling from one job location to another, or meeting clients in different locations within your normal area of business will not qualify as a business travel expense deduction. However, they may qualify as transportation expenses to the IRS.
Travel expenses must be necessary and ordinary in order to be deducted. Reasonable expenses will qualify, but any that are extravagant will not be able to be deducted.
If you choose to itemize your deductions by filling out a Schedule A, then you are eligible to deduct interest paid on a mortgage loan. Deductible mortgage interest falls into two categories:
- Interest for loan that was used to perform renovations on a primary or secondary residence, and the loan is backed by the property. The loan amount is limited to less than $1,000,000.
- Loan interest secured by your home but not used for renovating the property. Considered “home equity debt”, there is an additional $100,000 limit.
Your secondary residents can be anyplace with substantial plumbing, cooking, and sleeping arrangements. This can be a cabin, boat, home, or motor-homes, as long as they meet the living requirements. Loan interest paid on debt secured by boats, trailers, or motor-homes cannot be deducted in relation to the Alternative Minimum Tax.
Paying points on a loan with the intention of purchasing, refinancing, or improving either your primary or secondary home may allow you to deduct the points you spend. Though you should be aware, they’ll have to pro-rate the points amount over the life of the loan. Your closing statement should list the points paid, whether in a loan discount or origination fee. If you pay points during the original purchase of your primary home, you’re able to deduct the entire amount of points you or the seller paid during the year and which they were paid.
If you pay off or refinance your loan, you may qualify to deduct unamortized points that you used over several months. Loan interest on Investment Property, like margin loan interest and investment loan for partnerships, are limited by the investment income you receive for the tax year in order to be deductible.
According to the Affordable Care Act, health care that meets the lowest requirements is called a minimum essential coverage. Having minimum essential coverage is one way for taxpayers to avoid any penalties for not having health insurance. Without it, taxpayers may be fined for each month they’re without coverage, although the coverage gap exemption is available to those with up to three consecutive months of no Health Insurance.
The Affordable Care Act sets the standards for taxpayer’s health insurance requirements. Some types of health insurance plans follow each and every regulation set forth by the affordable care act, and some, known as minimum essential coverage, only meet the minimum requirements. Generally, these plans are based on the source of coverage instead of specific benefits.
Types of Health Insurance
In order to avoid penalties you’ll need to have minimum essential coverage. Some private insurances as well as many governments and employer sponsored health plans are considered minimum essential coverage. If you purchase Health Insurance through the marketplace, you’ll be covered and therefore avoid penalties.
These insurances typically qualify as minimal essential coverage:
- Coverage sponsored by an employer including retirement coverage and COBRA
- Plans purchased through the Health Insurance Marketplace
- Children’s Health Insurance Program
- Medicare Part A and Medicare Advantage plans
- Veteran’s Administration Plans
- Peace Corps volunteer coverage
- Coverage offered under the Non-appropriated Fund Health Benefit Program
- Refugee Medical Assistance supported by the Administration for Children and Families
- Self-funded coverage offered by universities to students for coverage beginning before December 31, 2014.
- State high risk pools for plans beginning prior to December 31, 2014.
Some Health Insurance plans offer limited coverage and do not qualify as minimum essential coverage. Some examples are those that provide only dental or vision coverage, or Medicaid benefits for family planning or disability only.
In many cases insurance plans offered outside of open enrollment are often short term, six benefit, or supplemental plans. There are no additional Health Care benefits, and if this is the only coverage a taxpayer has, then they can expect to be penalized at tax time. Other plans that don’t meet the minimum essential coverage guidelines are:
- Short Term Health Plans
- Fixed Benefit Health Plans
- Medicare Part D and Medigap
- Medicaid covering only certain benefits
- Vision only, Dental only, and limited benefit plans
- Grandfathered Plans (You won’t pay the penalty, but you also won’t be protected under the new regulations)
If you have any questions regarding whether or not your healthcare coverage meets the minimum requirements of the ACA, contact your provider.
There are certain education credits which exist to help Americans afford higher education. These credits help with qualified higher education expenses, like tuition and course fees. Some higher education expenses such as boarding, meals, and transportation do not qualify for these credits. Furthermore, tuition paid for classes which don’t apply credit hours to the degree sought by the student are also not deductible. Expenses that have been reimbursed through a scholarship, fellowship, employer, or are paid from distributions from an educational IRA or interest from the series EE U.S. savings bond are not deductible.
If a private person has gifted you money for the expenses, or has directly paid the expenses, it will still qualify for deduction as long as the courses began in the same year you received the gift, or within the first three months of the new tax year.
Only the taxpayer, their spouse, or they’re dependent are eligible to have their day expenses deducted through these credits. If you are someone else’s dependent, you won’t be able to claim the credit, as the person who claims you as a dependent qualifies for the educational credit no matter who paid the expense.
The Two Credits
There are two credits which can help with expenses for higher education. For the first four years, taxpayers should seek the American Opportunity Credit. For extended learning, like grad school and other opportunities, look to the Lifetime Learning Credit.
For the AOC, students must be enrolled at least half time by the regulations of the school, and they have to be studying to receive a degree or certification. The LLC does not follow the same guidelines, as a student can take elective courses to strengthen any skills.
AOC is applicable per student, while the LLC is applicable per taxpayer. For the AOC 100% of the first $2000 in qualifying expenses are covered under the credit. After this 25% of the next $2,000 in expenses qualify. AOC has a limit of $2,500 on $4,000 in qualifying expenses, is refundable up to 40% even without tax liability. LLC as a 20% credit on the first $10,000 of expenses.
Any costs that you incur relating to diagnosing curing treating or preventing illnesses or diseases are considered medical expenses. They can relate to any specialty of the body and can also include amounts paid for fee to doctors, dentists, surgeons, and other staff who provided medical care. In addition, medical expenses can also include the cost of equipment, supplies, or devices used to treat or diagnose.
In order to deduct medical expenses at tax time, the expenses must relate to a method of treatment or prevention for either a physical or mental illness. Expenses from General Health related items such as vitamins or stress relievers do not qualify for a tax deduction.
Medical expenses can include:
- Insurance premiums
- Costs for medical transportation
- Long-term care costs when paid to qualified services
- A portion of money paid a two sir in qualifying long term Care Insurance
If any of your expenses were reimbursed by insurance companies or other third parties, you won’t be able to include these expenses in your deduction. It doesn’t matter if the payment was made to you directly or to the service provider. If you pay by check, the date of payment is the day the check was mailed or delivered. In online payment or payment through the phone will have a date of payment as the day the bank statement posts. If you charge expenses on a credit card, it doesn’t matter when you pay, but the year in which the charges are applied to the card are the year in which they are eligible for deduction.
If you need to claim expenses for years past, you’ll have to file Form 1040X, Amended U.S. Individual Tax Return. You’ll need to file for the year that the expense was incurred. Generally, you have either three years from the filing date, or two years from the payment of due taxes, depending which is later, to file an amended return. Do not include expenses from previous years on your current tax return.
Once a divorce is finalized, a determination must be made for who will claim any tax credits relating to children that the couple had. Only one parent will be eligible to claim all of the credits. That means that credits, such as the Earned Income Tax Credit and dependency exemptions cannot be split between both parents. Whichever parent can claim the EITC must also claim the dependency exemption and the child tax credit, as well as any other relative tax breaks. In most cases, the right to claim these credits goes to the custodial parent, the may also qualify to use head of household status.
One exception to the custodial parent rule applies to divorced couples who live separately for the last six consecutive months during the tax year. The custodial parent has the option of forgoing their right to claim tax credits for the child, allowing the other parent to do so if qualified.
Regardless, the dependent care credit must only be claimed by the parent one that dependent lives with. In most cases, the custodial parent is the only one who can claim the EITC, because of the stipulation that says a child must live with the taxpayer for six months.
Custody, in terms of taxes, is determined by the amount of nights the child spends in the home, or the total amount of nights a parent was considered responsible for the child’s care.
Exemptions can save you a significant amount at tax time. For 2015, taxpayers can claim exemptions in three different categories, as long as they meet the requirements. Each exemption is worth $4,000, which is $50.00 greater than last year’s exemption amount. The exemption may be phased out for certain taxpayers who are considered high-income.
As long as you’re not claimed as a dependent on anyone else’s return, you may qualify to claim a personal exemption. If any other taxpayer can claim you as a dependent, regardless of whether not they do, then you can’t take the personal exemption on your own return. This applies to your dependents as well.
Married taxpayers who file a joint return together and neither spouse is eligible to be claimed as a dependent by another taxpayer, may claim a spousal exemption. If you file separately, you’re only able to claim your spouse is that spouse has no income and is not anyone else’s dependent.
A child or relatives can be claimed as a dependent if they meet all the requirements, including citizen and residency statuses. If your dependent is married, they must file a separate return from their spouse. Additionally, you can’t claim dependent exemptions if you yourself are dependent of anyone else.