Taxing The Small Businesses
You may hear the term "self employed" but what does it really mean
? When do you cross over from just being self employed to running a small business?And what do all of these changes mean for you and the way you file taxes? You are considered to be self employed or working for yourself if you are in business for yourself, if you carry on a trade or business as a sole proprietor or independent contractor.
You can also say that you work for yourself if you own a part time business alongside your regular job. Before you start your own business, you must learn how to legally operate your business.
This includes getting required licenses and permits for whatever field you are going into, coming up with a business name, financing your business and setting up tax and benefits for you and any employees you may hire.
For example, setting up a bakery will have many different permits that you need to obtain before you can start selling your food to people. You have to have the health department come and inspect the area where you plan to work and make sure that it stays up to par with all of the health regulations that they have on the workplace and the food.
When you work for someone else, you generally receive tax rights and employment benefits for your job. But as a self employed worker like an independent contractor, you would not receive any of these benefits and are usually responsible for your own expenses.
Sometimes it becomes a little unclear for the Internal Revenue Service to determine whether or not you work for yourself or someone else so the IRS will occasionally review your work status. They just want to make sure that you are not working for someone else so that you pay the right amount of taxes.
When you work for yourself, you are required to pay a self employment tax and estimated taxes. These are both similar to the social security and Medicare taxes that everyone else pays on their paychecks.
Estimated taxes are used to pay money on income that is not subject to withholding. If you have another job in addition to your self employed work, then you will still have to pay all of those taxes for your full time job.
To make sure that you are not interpreted as an employee in an audit, there are some different that you can do. First you should create a client contract to help prove that you work as an independent contractor.
Next, you should have multiple clients at the same time who are involved in different ways. This will show that you do not have a permanent job with one person.
If you are only working with one person, then it can show you as an employee and not an independent contractor. And then you will have to pay even more taxes that you should not have to in the first place.
Show that you can risk losing some money. This can be done by spending your money on regular business expenses.
Auditors will see that you are able to lose some money in your own business if there is no work. Come up with your own employment benefits.
Do not accept clients benefits if they are offered to you. Things like health insurance and paid vacation might sound really nice to you but if you use them then you will look like you are their employee instead of a client that you work with.
And the last thing to remember is to control the methods in which the work gets done. You dictate to your client how things will be done and in what time frame.
If it looks like they are the ones who dictate to you how to do your job, you will look like their employee instead of an independent contractor. According to the Internal Revenue Service, a client can tell you what the end result should be, but not how it should be done.
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