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Can there be anything more exciting than being self employed? Self employment
means having no boss. Being you own boss carries a tremendous responsibilty that
can bring with it tremendous rewards as well. Visit the top websites below to
get more self employment ideas.
A self-employed person works for himself/herself instead of as an employee of
another person or organization, drawing income from a trade or business. This is
less stable than working as an employee but tends to earn a higher hourly income
or rate.
In its simplest form, the individual and his business are one and the same
entity. This makes the owner personally liable for all the debts of the
business. To avoid this, he may choose to incorporate his business, protecting
his personal assets from creditors or others taking legal action against the
business.
Self-employed workers cannot contribute to a 401K plan, unless they
self-incorporate and set up a 401K plan for the company, but this requires some
significant paperwork. Most self employed set up a Self Employment Plan (SEP)
IRA, which allows them to contribute up to 20% of their income, up to $40,000 in
contributions, to the SEP per year. This is significantly higher than 401K
plans.
If a self-employed person's client goes bankrupt, the bankrupt company's actual
employees usually have first rights to whatever cash the company had. Next is
the IRS, and then all the external creditors, including the self employed
worker.
Self-employed workers are paid directly by clients or by their business, and
some proportion of these payments will be due to the government as income tax.
Unlike an employee of a company, a self-employed person must pay tax after
receiving his taxable income.
In order to avoid resulting interest payments to the IRS for paying taxes in
arrears, self-employed workers in the United States usually pay estimated taxes
quarterly, and at the end of the year, the tax return determines if these
estimated payments were enough. Another tax implication is that a self-employed
worker must pay both the employee and employer portions of the FICA tax (so
instead of 6.2%, they must pay 12.4% until they make enough that FICA is no
longer paid). Self-employed workers must also pay 2.9% instead of 1.45% for
Medicare on all income.
On the other side, self-employed workers can take far more deductions than an
ordinary employee. Anytime a self-employed worker visits a client, the trip
expenses are deductible (the deduction for driving any car is $0.385 per mile
plus any tolls incurred).
Other expenses such as uniforms, computer equipment, cell phones, etc. can be
deducted if there is a legitimate business use for these items. Since the
chances of being audited by the Internal Revenue Service are relatively slim,
many self-employed workers likely overstate their deductions. One deduction that
has a reputation for raising a "red flag" at the IRS is the deduction for a home
office.
Many people would simply put a desk in an attic, perhaps with an old computer on
it, and try to take a deduction (for depreciation). Home office deductions are
legitimate, although it has to be a legitimate office. The IRS will also
overrule other flagrant deductions, such as buying a Yacht and naming it after
your company. If you're an accountant or dentist, such a deduction likely won't
be valid.
If someone is self-employed, but works for only one client, and is otherwise
indistinguishable from a regular employee, then the IRS will probably require
the company to treat him as a regular employee.
The US Internal Revenue Service provideds Schedule C and SE of Form 1040 to
assist self-employed workers in payment of the proper amount of tax.
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