9 Tax Rules to Consider If You’re Your Own Boss

Does the idea of being your own boss and being in business for yourself appeal to you? 

Many people who launch small businesses start out as sole proprietors. However, there are tax rules and considerations to consider if you’re a sole proprietor.

Here are nine things to consider if you are your own boss

1 – You may qualify for the pass-through deduction

To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. 

There are tax rules to consider if you're your own boss

The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income.

However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.

2 – Report income and expenses on Schedule C of Form 1040 

The net income will be taxable to you regardless of whether you withdraw cash from the business. 

Your business expenses are deductible against gross income and not as itemized deductions. 

If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses, and losses in activities in which you weren’t “at risk.”

3 – Pay self-employment taxes

For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. 

An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. 

Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income. 

4 – Make quarterly estimated tax payments 

For 2019, these are due April 15, June 15, September 15 and January 15, 2021. 

5 – You may be able to deduct home office expenses 

If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. 

And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

6 – You can deduct 100% of your health insurance costs as a business expense 

This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

7 – Keep complete records of your income and expenses

Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. 

Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits. 

8 – Requirements change if you hire employees

When you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes. 

9 – Consider establishing a qualified retirement plan 

The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. 

Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. 

A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. 

If you don’t establish a retirement plan, you may still be able to contribute to an IRA. 

David Mills CPA, LLC has the expertise to assist small businesses

At David Mills CPA, LLC, we work with small businesses throughout the Central Illinois.

We have offices in Morton and East Peoria and can assist business owners with advice, bookkeeping, payroll, income tax planning and preparations, and business valuations

We can also help business owners understand the various business structures to ensure their business is structured to best meet their needs.

For more information, contact David Mills CPA, LLC today.