For The Love Of Money Top 10 For The Self-Employed
Excerpt from For The Love Of Money: The 411 To Taking Control Of Your Taxes and Building Your Net Worth (2005 iUniverse, Inc.), by Shannon Nash, CPA


1. "Practice What You Preach," (Barry White, 1994). If you have a formal side business that is separate from you (like a corporation, partnership or limited liability company), you must act like you do. This means you have to follow the formalities, like: a separate business bank account, actual board meetings, minutes from those meetings, a stock ledger and stock certificates that have actually been issued, and formal resolutions to document the actions taken by your board. Failing to do the formalities may cause the IRS to disregard your business type and treat you like a sole proprietorship.

2. Know the difference between an employee and an independent contractor. Just because you have your own practice or work in a small office, doesn't mean that all your workers are independent contractors. Even the part-time receptionist and file clerk might still be an employee. For help on this, see IRS Publication 1779, Employee Independent Contractor Brochure.

3.You should pay yourself some amount of salary. What if you don't? If you take money out of this business account, the IRS may consider this to be a payroll expense and you could owe payroll taxes. This is the case, even if you call it a "loan" but yet you have no formal promissory note. Speak with a tax advisor about coming up with a reasonable amount for your salary, and structuring employee loans if you plan to pay the money back to your business.

4. Do you have "Work To Do" (Vanessa Williams, 1992)? You are probably busy doing your passion, but make sure that you include some time in there for tax planning. You should be meeting with your tax advisor on a regular basis (at least twice a year) to ensure that you are making the right quarterly estimated tax payments and tracking the maximum amount of your deductions.

5. While you're busy doing the "Work It" (Missy Elliot, 2002), don't forget to save for your future. Social security may not be there to help you, and if it is, the benefits will probably be too small to meet your needs. Look into setting up things, like: a Solo 401(k), SIMPLE IRA, SEP IRA or Keogh Plan. Your earnings in these accounts grow tax-free, and they can be fairly easy to set up. Too busy piling money back in your side business to set this up? Think again. With proper tax planning, almost anyone can find tax savings that can be used to help fund your self-employed retirement plan.

6. Business transportation expenses, whether by your car, airplane, railway, or boat, really add-up. I don't care how you "Get Here" (Oleta Adams, 1990); make sure you only take the business portion of these expenses. Many times, there are personal elements associated with your travel (like personal miles on your car or personal time spent on a business trip or convention). You must back-out the personal portion of these costs. Also, remember that you can only deduct 50% of your associated entertainment expenses (i.e., the food at a business meeting).

7. Do you run your side business out of your home? You may be eligible for the home office expense deduction. This includes deducting the business portion of your home expenses for things, like: rent, leases, mortgage payments, insurance, utilities, general repairs, home owner association fees, trash removal, cleaning services, snow removal, grass and lawn maintenance; but make sure that this is truly your primary office and not a part-time place where you keep some business files and a computer. This office should be a separate room or place in your house that is only used for business purposes. As this is an area that the IRS tends to audit meet with your tax advisor to make sure you can back-up your deduction.

8. Regardless of which income bracket you fall, self-employment tax is due when you have more income than your expenses. Having a mortgage, giving to charity, etc does not remove this bill!

9. Do you always feel like "Somebody's Watching Me" (Rockwell featuring Michael Jackson, 1984)? For those who think they are sitting under the radar and the IRS does not know that you exist or that you have been working (because you haven't filed in years) -- THEY KNOW WHERE YOU ARE! Expect them to show up when your BIG contract closes.

10. Check for local and city tax permits and licenses necessary to operate your business. For example, many states and localities charge taxes on your business property. Make sure to research requirements. Thankfully, a lot of states have exemptions from these taxes for small businesses.


Copyright 2005. Shannon Nash. All rights reserved.


Shannon Nash is a tax attorney and C.P.A. She received her Bachelor's degree in accounting from the University of Virginia, McIntire School of Commerce and her law degree from the University of Virginia School of Law. She is a past officer of the American Bar Association and Chair of the National Bar Association Tax Section. She also writes the "Special Needs Journey" column.


September 1, 2005