Tips to Reduce Self-Employment Taxes

Tips to Reduce Self-Employment Taxes

by | Jan 30, 2018 | Investment & Income, self employment tax

Tips to Reduce Self-Employment Taxes

Tips to Reduce Self employment Taxes.Self-employed individuals need to pay self-employment taxes on the top of income tax. It might seem a bit harsh on some individuals. The self-employment taxes help federal programs such as social security and Medicare. So here are some ways by which you can cut down your tax liability if you are self-employed.

Corporation

In the event that you have created a corporation or limited liability company, you can benefit as a self-employed individual. If you proceed with an S Corp election, you might be able to reduce your tax liabilities under self-employment taxes. S Corp allows you to pay yourself from the profits and distribute the rest among shareholders or other employees. It also allows you to draw a reasonable amount from the total earning as salary. If the amount exceeds certain limits, it would come under income tax and not employment taxes.

SE Declaration

As per the guidelines set by the IRS, anyone making more than $400 out of self-employment is liable to pay taxes and has to file tax returns. You must include a Schedule SE with your tax returns which help you calculate how much self-employment tax you owe to the government. There is a small catch over here. When you fill out the Form 1040, as per IRS guidelines you can adjust your income by deducting a portion of your self-employment earnings. This clause lets you reduce your self-employment tax liability between 50-57% depending on your earnings.

Business Expenses

IRS has a few clauses that can help self-employed individuals to reduce their tax liabilities. One of them is declaring expenses. You can declare various business expenses if they helped you in any form to continue with your work. Of course, you cannot include leisurely trips as part of the expenses. Money spent on items such as advertising, office space, supplies and business related travel qualify for this. Let’s assume your taxable income is $40000 and you went on a business trip which accounted to $5000, your net taxable income would be $35000.

Health Insurance

This is one of the most visible advantages of self-employed over normal employees. Self-employed individuals can claim their entire health insurance costs. As long as you had some profits for the year, you can go ahead and claim your health insurance in full. When you deduct the health insurance amount, your taxable income for the specific year reduces, thereby reducing your total tax liability.

Deferred Income

Deferring your income to a later date is another smart way of reducing your tax liabilities for a specific year. Don’t worry, we are not asking you not to get paid at all, rather defer the payment depending on the timings. Since you are responsible, you can decide when you want the payment. Deferring the payment by a few days or weeks might enable you to pay lower self-employment taxes. For an example, if due to $3000 you are getting into the next bracket of tax, you can defer the same for the next month, provided the payment is really close to financial year end. Of course, you need to access if you need the money or it can wait for some time or not.

Home Office

If you use your home for your business purpose, you can deduct some amount from your taxable income on the front of expenses such as utilities, any rent paid or insurance of home. In fact, IRS has a simplified process that you can benefit from.

Measures mentioned above should help you as a self-employed individual to understand and brings down your self-employment tax liability. bulgari copy
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Child and Dependent Care Expenses

Child and Dependent Care Expenses

by | Jan 23, 2018 | Deduction & Credits

Child and Dependent Care Expenses



Child and Dependent Care Expenses.Paying for day care expenses slowly and steadily becomes a large chunk of the household income. But there is very little that working parents can do about the same. The IRS understands your pain and that is the reason they let you take credit for such expenses. You can avail up to 35% of the total expenditure on childcare or daycare services, of course, subject to certain conditions.

Details of Expenses

In order to avail the tax credit, you must have a kid or adult who cannot take care of themselves and thus require such services. Also, you need to have a source of income to justify the need for such services.

The whole idea of this tax credit system is that the daycare services let you work.

The same is applicable if you attend school as well. If you are married, your spouse must either be working or attending school or looking for a job. If they stay back home, they would be able to take care of the dependents and thus the credit system does not hold good anymore. If your spouse is disabled and is unable to take care of the dependent, then you can avail the tax credits.

Dependent

To qualify as a dependent kid, your child must be younger 13 years. If he or she is more than 13 years and is unable to take care due to any form of disability, they also qualify as dependents. The rules do not allow you to take a tax credit for a dependent that does not stay with you for more than half of the year in question.

Some parents do not claim dependent care if they are divorced or separated. But they can still go ahead with child care credit.

It is applicable only to custodial parents and not everyone.

Day Care Services

The laws do not allow one of your dependents to be the care taker of another dependent to avail the credits. For an instance, you cannot have one of your elder kids look after your younger one and claim the same. Unless one of your children is not dependent on your anymore or is above 19 years.

It is easier to take help of professional day care services, where you do not have to go through a lot of questions.

Any day camps also qualify for such credits. However, if your spouse has claimed the credits you cannot claim it again.

Tax Benefits

If your daycare charges are up to $3000 for one dependent or $6000 for more than one dependent, you can avail the credits. The above are merely qualifying amounts and a certain percentage of it qualifies for credits.

For an example, if you have two dependent kids and the day care charges are $8000, only the first $6000 will qualify for the calculations.

Your income also plays a large role in the amount that is passed on as childcare or dependent care credits. The status of tax filing also plays a small role in deciding the tax credits. Calculations let you claim only the amount that you have spent or your actual income for that year. For an instance, you could have spent $6000 for day care expenses but have earned $4500 for that year. In such scenario, only $4500 is eligible for the tax credit.

Some employers provide compensation for day care facilities. You must deduct the same from your tax filing. Lastly, depending on your adjusted gross income the tax credit comes usually varies from 20 to 35% of your actual expenditure. There are no upper limits on how much you must earn to avail these benefits.

Details about Capital Gains

Details about Capital Gains

by | Jan 20, 2018 | Investment & Income, Tax Planning

Details

about Capital Gains

Details about Capital Gains.Who wouldn’t like to see their assets growing on a regular basis? As much as we enjoy seeing our assets swell up, there is a different side to it that we must deal with, capital gains. A capital gain is a type of tax than an investor has to pay if he/she sells his/her assets at a higher value than what they had purchased the same for. It must be noted, that if you as an investor are holding on to assets and their net value increases, you are not liable to pay any capital gains.

It only comes into picture when you sell the same. For an example, you could hold on to stocks of your favorite company. The value of the stocks would appreciate year over year, but you do now owe any capital gains tax unless you sell those stocks. Anyone who sells their assets for a profit would come under the purview of the capital gains tax unless an individual does it for a living. The simplest example would be that of a day trader. They indulge in the selling of stocks on a daily basis when then gain a certain amount. For them, the gains are calculated under the head of business income.

Tax Rates

The tax rates when it comes to capital gains are primarily split as short-term or long-term. As the names suggest, these primarily depend on how long you are holding the assets along with you.

Any profits that you accumulate within a short span of time will be calculated under the normal income tax rates.

However, if you hold on to assets for more than a year, the tax rates come down significantly. In fact, some individuals might even qualify for 0% tax rates for holding assets for more than a year. We will take a couple of examples and see how the tax rates come into the picture.

When it comes to single filers, taxpayers who qualify for the 10% and 15% tax bracket are not liable to pay any capital gains tax when it comes to long-term gains. Short-term gains are taxed at the same rates as income tax for people in the 10-15% brackets.

When the tax bracket for income increases, so do the short-term and long-term capital gains. For people in the 25-35% bracket of income tax, the short-term capital gain remains the same.

However, the long-term capital gain is set at 15%. Similarly, individuals taking home in excess of $418,401 a year are taxed at 39.6% for short-term gains, while the long term-gains remain at 20%.

The capital gains tax on short-term gains remains the same as income tax, irrespective of your status while tax filing. Similarly, irrespective of whether you are married filing jointly, married filing separately or are head of household, the long-term capital gains remain the at 15% for people coming in the 25-35% tax bracket and 20% for people who come under the 39.6% income tax rate slab.

Qualification

The capital gains tax system comes into the picture primarily for assets such as real estate, bonds, and stocks. It is usually not applicable to cars, boats and other similar stuff. When you sell these eligible assets and make money off it, is labeled as capital gains. Any loss you make also qualifies as a capital loss and can be used to check the profits.

For an instance, if you sold stocks of a company with a profit of $2000 and sold another stock at a loss of $400, your net capital gains will be valid on $1600.

If you someone who regularly buys and sells the above assets, it is worth spending some time on understanding your capital gains liability.

Reporting of Income and Payment made via Virtual Currency

Reporting of Income and Payment made via Virtual Currency

by | Jan 16, 2018 | Virtual Currency

Reporting of Income and Payment made via Virtual Currency

Reporting of income and payment. In the current year, virtual currency has taken the entire world by storm. At the current times, they look like ever appreciating assets but with profound risks involved. If you have been even remotely aware of the proceedings, you would have heard of Bitcoin and its spectacular rise. Though it is one of the very first and famous ones, there are several others as well.



It is only but natural to worry about taxation when it comes to virtual currency. Sure, they are decentralized and do not necessarily depend on the economy of countries. But when you are part of a system and are trading with virtual currencies, you are liable to pay taxes. The IRS understands that these virtual currencies can either be used to buy goods or services or can also be held as an investment like other instruments. Thus depending on the type you choose, the tax implications of virtual currencies change accordingly.

At the Receiving End

Even though the law at this point does not consider virtual currencies as a currency, you must report if you receive any. You could receive virtual currency in return for the goods or services that you provide to someone. If you are an employee, your employer might also provide you with virtual currencies as remuneration. But irrespective of the source, you need to add the same to your gross income, and normal tax laws will be applicable.

What is important here though is to figure out the fair dollar price and add the same to your gross income. And the fair value must be calculated for the day, the payment was received on. One might argue as to what is the basis for adding the same to gross income. In simple words, you received something that has a fair dollar value and as per the Basis of Assets, it is taxable.

How to figure out fair dollar value?

It is up to the individual to figure out the fair dollar value of the virtual currency on that specific date. If the virtual currency is listed on any of the exchanges, the price of the same is decided based on demand and supply. Thus, depending on the exchange rate the valuation of virtual currency is converted into dollars and the same must be reported in your earnings.

Other modes

You can obtain virtual currencies apart from gaining them in exchange for goods and services or remuneration. Almost all the virtual currencies work with the underlying principle of mining. Mining is a process where you receive virtual currency for solving complex algorithms using computing powers. The same also holds well if you keep a track of all transactions and maintain a ledger. Though the mechanism might differ, the central idea remains the same. Getting  paid in virtual currency on the completion of certain tasks.

If you are an employee and are mining virtual currencies, the same must go into your gross income. The process of figuring out the fair dollar value for the specific day holds good here as well. If you are self-employed, the earnings are also subject to self-employment taxes. Some individual’s or rather independent contractors also engage themselves in mining in exchange for virtual currencies. Self-employment taxes are applicable to them as well. If the same is carried out with the intent of trading or any business-related activity and an employee is not involved.

Virtual currencies, even though quite new to the circuit, already have made their ways into the tax system. If you wish to trade in any virtual currency, it is prudent to be aware of the taxes and take the necessary steps.

Bitcoin Mining as Business? Know its Tax Implications.

Bitcoin Mining as Business? Know its Tax Implications.

by | Jan 12, 2018 | Virtual Currency

Bitcoin Mining as Business? Know its Tax Implications

Bitcoin Mining as Business.Slowly yet steadily virtual currencies are making their way into our lives. It has garnered a lot of interest amongst investors. While some feel that virtual or crypto currency is the future of money, others believe these are good investment instruments.

You must be naïve to think these do not come with inherent risks, but that’s what makes them potential game changers as well. Take the most famous ones, for example, Bitcoin, Ethereum, and Litecoin. The valuation of these three virtual currencies has gone up several times through the year 2017. The likes of Litecoin has gone up by 75 times this year alone.

A lot of us are not very clear on how to get our hands on these virtual currencies should we want to. Well, there are two primary ways in which you can do so. Firstly, you can reach out to one of the exchanges, Coin base for an example, and set up an account with them. You can then link different modes of payment such as credit or debit card or wire transfer. The exchange would then hand over the virtual currency to your account.

The second way of acquiring virtual currencies is to mine them. Mining is a process by which you solve complex algorithms, usually known as Blocks. In exchange for solving these algorithms, you receive a certain quantity of virtual currencies. Well, you do not have to literally sit down and solve equations, you can use computing resources to do the same. Once you make enough of these virtual currencies, you can sell them at their exchanges in return for real currency. And that is how you make money.

Is bitcoin mining treated as Business?

If the mining done by a taxpayer comprises of any trading or business entities and are not undertaken by someone who is employed, then the same qualifies as a business unit. All the earnings from mining, in this case, would then qualify for the self-employment taxes. All the earnings from self-employment, which is usually the net earning minus the deductions, is liable for taxes.

Thus, all earnings from virtual currency must be added to your total income.

It is crucial to note that earnings in the form of virtual currency must be converted to the fair dollar value for that specific day and added to your income.

Self-employment taxes are also applicable if you carry out mining individually as a contractor.

As a rule, any income that is an outcome of trades or business carried out by an individual unless he or she is an employee qualifies as self-employment taxes. So even if you are an independent contractor who does mining and receives virtual currencies, you are liable to pay taxes.

Capital Gain

Investors are slowly mustering the courage to invest in virtual currencies for the long term. If you hold on to your virtual currencies for the long term, they will be treated as other capital assets. Assets such as stocks, real estate, bonds etc. attract capital tax gain or loss. Virtual currencies are also subject to capital tax, should you want to hold on to them for a long term horizon as the IRS considers them as property.

Virtual currencies are also subject to employment taxes if your employer pays you in virtual currency as remuneration. The same rule is applicable here as well, wherein the fair dollar value of the respective virtual currency is taken into consideration.

Since the laws on virtual currency system are in its nascent stages, chances of amendments to the law are high. It is recommended to keep a close eye on the taxation of virtual currency.

Check out more about Taxing in Virtual Currency.