It is easy to see why a self-employed individual would see the self-employment (SE) tax as unfair. While in an organization, that same employee would have to pay taxes amounting to roughly 7.65 percent. However, as a self-employed individual, those same federal taxes run approximately 15.3 percent. One of the ways to mitigate this tax is to fill out Schedule C. The following points demonstrate the good and bad qualities of Schedule C, something every self-employed individual should be aware of.
1. Home office deduction: Income tax is reduced in Schedule A deduction, but in Schedule C deduction, in addition to income tax, SE tax is also reduced. There are some misunderstandings about home office deduction. It is not true that you will invite an audit if you mention home office deduction, but on the other hand, if you do not include the deduction you may have to end up paying high tax. Also some believe that same tax amount have to be paid if they include property tax and mortgage interest on Schedule A or home office deduction on Schedule C, which is not the fact.
2. Tax preparation fees deduction: Mention the tax preparation fees on Schedule C and reduce both income tax and SE tax. One can also show the tax preparation fees on Schedule A but there will be less benefit. So always prefer to reduce your taxes.
When itemizing deductions on Schedule A, miscellaneous deductions are limited to two percent of the Adjusted Gross Income for the taxpayer. Therefore any deductions listed under this heading must exceed a certain amount before any benefit is realized from the deduction.
Schedule C has certain limitations. You can mention only the Tax preparation fees, which are the fees you pay for business work done by your accountant. The accountant fees should be split in to two forms, the business form and non-business form. The business forms includes Schedule C, Form 8829 and 4562 and Schedule SE. The non-business forms include Schedule A and Form 1040.
Do not neglect to include such work as paycheck processing, software consultation, keeping books, or the payroll tax returns that were done by an accountant.
3. Tax Preparation software program: There are many calculations to be done while filing Schedule C. Though the tax appears to be 15.3% it is not. First of all the tax is not paid on 100% of the profit but it is paid only on 92.35% , secondly fill in form 1040 and take a 50% deduction on SE Tax. And there is also some calculations on the Medicare portion and the social security portion of the SE Tax. All this seems to be a little complicated, so it is always good to use a software program which can be purchased paying a few dollars.
Perhaps you are attracted to the promise of financial independence of running your own business, or the bliss of not having to answer to someone else as a boss, the dream of not being a slave to someone else's rules and limitations is a potent one. If you are considering striving towards this dream at the moment I imagine that you are carefully examining all of your available options that would free you from the chains of your present place of employment.
The dream might be strong enough but you must take control and be realistic of your expectations. The potential financial gains may be attractive but one must consider the cost of time involved, financial expenses and genuine effort involved in becoming independent.
Despite the promise of financial rewards and limitless opportunity you but realistically be prepared to accept the truth, that is you are unlikely to see much, if any reward for some months, or even years.
Launching your own business, while holding down your present work is the wisest way to begin. But there are other options available, such as building an adequate financial savings account to carry you through the early steps in your own business. These savings must be strong enough not only to carry you personally though these days, but your business also.
You must also be aware that time is going to be required when launching your own business, and lots of it. It might sound silly having to mention a time factor where passions are involved, love is likely to drive you forward, but in the real word we do have other obligations apart from our future aspirations. Certainly in this world we have family and friends, and real commitments not at all related to our businesses. You must consider how much real time to have available to spend in launching your business.
Expendable effort is another consideration that must be taken into account before any business may be considered profitable. You really must consider how much effort you have available and the results you would expect to create from what you give. The truth is that you will be working for free some days, client hunting, marketing and yes, even free jobs, are all things that come with the territory if we like it or not. Many days will seem to be so much work and nothing to show for it.
This is when many people simply give up. This is where you will have to dig into your reserves and stay strong to the task. This is when you're working your hardest; it is a sad shame to think that you would give up now. Mentally it is a real challenge, but this is where the real entrepreneurs are separated from the wishers. Some will see these obstacles as something that will be overcome; others will not keep the faith. Some will succeed some will not.
Here, if you keep on keeping on you will begin to see the fruits of your labors real soon, and then you will know, without a doubt, that it was all worth the work.
Both Ron Finkelstein & Kevin Sinclair are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.