“But I don’t have a business”

Actually, you might, even if you never registered a business name or formed a company.

What is considered a business?
If you have non-employee, non-wage compensation you get for doing work where there are no taxes withheld then you are an independent contractor. Per IRS regulations (and general common sense) that constitutes someone with a business that has expenses (unless you want to pay 25% minimum in taxes plus penalties and interest on 100% of your earnings). So learn to track them.

My website has a section called Tax Tips where you can find a lot of information like Auto expenses, entertainment and home office deductions. You can also find more through this IRS link:

https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

Specifically look at “Who is Self-Employed” (2nd paragraph), plus the home office and auto deductions.

Here are some of the more common categories from the Schedule C “Self Employment” tax form:

1. Automobile: Mileage is usually best. This includes mileage from home to and from the
the client’s location, trips to purchase supplies or take classes related to the
business.
2. Home Office: If you are self-employed and do not have an office outside the home, then
a portion of your home expenses may be included as expenses against the
income you receive to include: rents, utilities and insurance.
3. Equipment: Computers, phones and other equipment necessary to perform and/or
keep in touch with clients is deductible or depreciable against income. The same
is true of furniture and fixtures (decorations and things like lights)
4. Other: Other expenses such as office supplies, advertising, continuing education
and any other expenses necessary to earn the income can be deducted.

Here are explanations for some of the more-frequently -misinterpreted items:

• Advertising can be anything that tells people who you are and what you do for the purpose of
  drumming up more business: flyers, business cards, even promotional gatherings.
• Auto expenses are the costs to run your vehicle from your home office to anyplace if it is business related (hint – combine business trips with personal errands to make the personal use deductible)
• Commissions and Fees and Contract Labor are what you pay to non-employee individuals (independent contractors) for their services IN your business – they help you do what you do and you need to pay them (such as high-school students who hand out flyers, people that ‘sell’ your services for you on commission, that sort of thing). See below on how to determine who is a contractor and who is an employee.
• Legal and Professional are what you pay to people for their services FOR your business – they perform services you need in order to do what you do and usually have businesses of their own (attorneys, computer support professionals, etc.)
• Office expenses and Supplies are often confused with one another: Office Expense would be items like postage, small tools and equipment under $500 (staplers, adding machines and such, plus such food-stuffs as are kept for the convenience of your employees, clients and/or customers). Supplies would be things like paper, pencils, printer ink, and so on. If you make/buy things to sell, the materials, supplies and inventory costs are tracked separately as Cost of Goods Sold.
• Repairs and maintenance – could be the cleaning service for your house, fixing a desk, that sort of thing.
• Travel & Meals – while this deduction has been severely curtailed, it’s not gone. So track everything (dates, times, location and ALL costs while away) and let your tax preparer sort it out.
  • Travel is anytime you have to go someplace where you cannot return home the same day. It includes the cost of the actual travel (car, bus, plane, etc.), hotel/lodging, and a certain amount of per-diem for tips and incidentals which changes every year.
  • Meals are not ‘lunches’ but can be if they are promotional in nature and/or out of town while traveling.
• Utilities – these are OTHER than the utilities for the home office which will be included in that category. So Cell phone, special internet access, etc.
• Wages are NOT what you take for yourself (there are exceptions to this you can discuss with your tax preparer), but what you pay to your employees where taxes are withheld and remitted to the government on a weekly, monthly or quarterly basis.

While an individual may be very able to list the income and direct expenses of the company, the tax laws covering administrative expenses and home businesses are very complex and change from yearto-year. It is ALWAYS a good idea to consult with a professional tax preparer so you don’t miss out.

Taxes on Self Employment:
Self Employment income is taxed at a minimum of 25.3%. Consequently, for every $10 dollars you find of expenses to claim, you will save at least $2.50 in taxes.

This is because the profit from a business is taxed for INCOME TAX (minimum tax rate of 10%) AND for SELF-EMPLOYMENT TAX (the business-owner’s version of Social Security which is 15.3%). Please see the Tax Tips discussion on Self Employment Taxes.

Trust me, the minimal effort it takes to track your expenses is well worth it come tax time.

One last piece of wisdom I give to all my clients: When you are self employed EVERYTHING is tax deductible until your tax preparer says it isn’t. So TRACK EVERYTHING – make notes, keep/scan receipts, annotate credit and debit transactions.

Independent Contractors:
Whether someone is an employee on whom taxes must be withheld or an independent contractor who is, essentially, self employed an responsible for their own taxes is a constant topic of debate between business owners and taxing authorities.

The reason this is important is because it decides who is responsible for sending the government the taxes they are allowed to collect on wages and income.

Two types of word relationships are crystal clear:
Employee: Someone who works for you all the time at your place of business using your resources or tools to do what you tell them to do how and when you tell them to do It and who gets paid wages or salary on which you withhold taxes and/or possibly pay benefits.

Contractor: Someone who has an established business, issues you an invoice or receipt for their work which they do using their own resources or tools in a manner and time of their own choosing (or negotiated with you).

But there are the people who fall in-between these two clear-cut options. Just because you say they are not employees does not, automatically make them contractors and alleviate your responsibility to withhold and pay payroll taxes or pay benefits.

The IRS has a discussion on what is an employee vs who is a contractor. You may find it on this link:
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employedor-employee

Essentially, the decision comes down to who controls the behavior, finances, and resources of the individual involved as compared to the business. There is no magic formula for determining who is and is not and the IRS has a form you can complete (SS-8) to ask them what they think which will take several months. BUT, there are three important things to take into account (Each state has its own expanded list but this is the Federal determination criteria):

1. 1. Behavioral: Does the company control or have the right to control what the worker does and how the
      worker does his or her job?
   2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things
      like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
   3. Type of Relationship: Are there written contracts? Will the relationship continue and is the work
      performed a key aspect of the business?

Consequences of Treating an Employee as an Independent Contractor
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker (both your portion and their portion which you failed to take out of their pay) plus penalties and interest and it gets compounded by the States if your state has an income tax. It can get very expensive to make a wrong choice.

RULE of THUMB: When in doubt – treat them as an employee.

If you don’t want the payroll and/or worker’s compensation headaches you can lease them through an employee leasing company OR you can hire a payroll company to take care of the payroll for you