| The United States is a nation of
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| | self-employment taxes at a rate of 15.3%
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| entrepreneurs. There are literally tens
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| | on your net earnings up to $87,900 for
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| of millions of self-employed individuals
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| | 2004. For net income in excess of
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| that enjoy pursuing their dream business.
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| | $87,900, you will pay further taxes at a
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| Of course, few of you enjoy the paperwork
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| | rate of 2.9% on the excess.In an
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| and confusing tax issues that arise from
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| | interesting twist that reveals the
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| owning your own business.Many
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| | confusing nature of the tax code, you are
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| self-employed individuals are considered
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| | allowed a partial deduction for the
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| "sole proprietors" or "independent
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| | self-employment tax. Simply put, you are
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| contractors" for legal and tax purposes.
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| | allowed to deduct one-half of your
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| This is true regardless of whether you
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| | self-employment taxes from your gross
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| are turning a hobby into a business,
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| | income. For example, if you pay $10,000
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| selling an indispensable widget or
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| | in self-employment taxes, you are allowed
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| providing services to others. As a
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| | a deduction on your 1040 return of
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| self-employed person, you report business
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| | $5,000. Many self-employed individuals
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| revenue results on your personal income
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| | miss this deduction and pay more money to
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| tax return. Following are a few
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| | taxes than needed.Health Insurance
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| guidelines and issues you should keep in
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| | DeductionThis used to be a very messy
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| mind if you are pursuing your
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| | area for self-employed individuals, to
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| entrepreneurial spirit.Schedule C - Form
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| | wit, you received little tax relief when
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| 1040.As a self-employed person, you are
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| | it came to your health insurance bill.
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| required to report your business profits
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| | This was a particular burden for small
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| or losses on Schedule C of Form 1040. The
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| | business owners when considering the
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| income earned through your business is
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| | astronomical cost of health insurance.
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| taxable to you as an individual. This is
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| | All of this has changed and you now may
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| true even if you do not withdraw any
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| | deduct 100% of your health insurance
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| money from the business. While you are
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| | costs as a business expense.No
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| required to report your gross revenues,
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| | Withholding TaxUnlike a salaried employee
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| you are also allowed to deduct business
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| | sitting in a cubicle, you are not subject
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| expenses incurred in generating that
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| | to withholding tax on your paycheck.
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| revenue. If your business efforts result
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| | While this sounds great, you are required
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| in a loss, the loss will generally be
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| | to make quarterly estimated tax payments.
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| deductible against your total income from
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| | If you fail to make the payments, you are
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| all sources, subject to special rules
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| | subject to a penalty, but the penalty is
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| relating to whether your business is
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| | not the biggest concern.A potential and
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| considered a hobby and whether you have
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| | dangerous pitfall of being self-employed
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| anything "at risk."Home-Based
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| | is failing to pay quarterly estimated
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| BusinessMany self-employed individuals
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| | taxes and then getting caught at the end
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| work out of their home and are entitled
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| | of the year without sufficient funds to
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| to deduct a percentage of certain home
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| | pay your taxes. The IRS is not going to
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| costs that are applicable to the portion
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| | be happy if you fail to pay your taxes
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| of the home that is used as your office.
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| | and you will suffer the consequences in
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| This can include payments for utilities,
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| | the form of penalties and interest.
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| telephone services, etc. You may also be
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| | Making sure you pay quarterly estimated
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| eligible to claim these deductions if you
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| | taxes helps avoid this situation and it
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| perform administrative tasks from your
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| | is highly recommended that you follow
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| home or store inventory there. If you
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| | this course of action.Record KeepingYou
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| work out of your home and have an
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| | must maintain complete records of all
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| additional office at another location,
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| | business income and expenses. Simply put,
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| you also may be able to convert your
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| | document everything. Create a filing
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| commuting expenses between the two
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| | system for each month and file every
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| locations into deductible transportation
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| | receipt, etc. All business travel
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| expenses. Since most self-employed
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| | expenses must be documented, including
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| individuals find themselves working more
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| | auto mileage you incur when performing
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| than the traditional 40-hour week, there
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| | business tasks. Office supply stores sell
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| are a significant number of advantageous
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| | business mileage books that you can keep
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| deductions that can be claimed.
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| | in your car and use whenever you travel.
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| Unfortunately, we find that most
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| | If you have any doubt about documenting
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| self-employed individuals miss these
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| | something, just do it!In ClosingAs a
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| deductions because they are unaware of
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| | self-employed individual, your focus and
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| them.Self-Employment Taxes - The Bad
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| | time is spent on making your business
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| NewsA negative aspect to being
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| | successful. Your focus is not on the
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| self-employed is the self-employment tax.
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| | complexities of the tax code and how to
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| All salaried individuals are subject to
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| | limit the amount of taxes you owe. If any
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| automatic deductions from their paycheck
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| | of the information in this article is new
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| including FICA, etc. In that many
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| | to you, then it is highly likely you have
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| self-employed individuals often do not
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| | paid far more in taxes than
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| run a formal payroll for themselves, the
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| | required.Richard A. Chapo is with -
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| government must recapture these taxes
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| | recovery of business taxes through tax
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| through the self-employment tax. Simply
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| | help and tax relief. Visit to read more
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| put, you are required to pay
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| | business tax articles.
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