Dear Tax Talk,
I recently changed careers from an 8-to-5 cubicle job with a net paycheck, to a work-from-home mortgage broker receiving a gross paycheck. I work for a mortgage broker company, so I didn't set up my own business, but do I still do my taxes as if I were a business? Like keeping track of expenses and filling out Schedule C?
There is nothing like being your own boss and ditching the cube. Of course, there's also nothing like a steady paycheck. Now that you've entered into a new partnership with the Internal Revenue Service (they participate in your profits), you need to know a little bit about operating a small business. The most common small business is the unincorporated sole proprietor, which is basically anyone who works and is not an employee. Sole proprietors file Schedules C and SE of Form 1040. Schedule C is used to report gross income and ordinary and necessary business expenses. Gross income will generally come from Form 1099-Misc that will be issued in your individual name from businesses that pay you more than $600 during the year. Most payers should request a Form W-9 from you that asks for your identifying data so that they can generate the Form 1099. Publication 334 discusses operating a small business, including accounting methods and record keeping.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. They do not include items of a personal nature such as clothing, dry cleaning or nonbusiness meals and groceries. Typical expenses would be automobiles, computers, office supplies, professional fees, telephones, and business travel and entertainment. If you have a dedicated area in your home for business purposes, you can claim a portion of your household expenses as a business expense. Publication 535 discusses business expenses and Publication 463 discusses automobile, travel and entertainment deductions.
The most common way to keep track of all your expenses is by issuing checks and paying with credit cards. If you are frequently issuing checks for business expenses, you should strongly consider opening a separate bank account for the business.
Federal income tax is a pay-as-you-go tax. You must pay it as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way (for example, your spouse may have additional tax taken from her paycheck to cover taxes you expect to owe), you might have to pay estimated tax. You generally have to make estimated tax payments if you expect to owe taxes, including self-employment tax (discussed below), of $1,000 or more when you file your return. Use Form 1040-ES to figure and pay the tax. If you do not have to make estimated tax payments, you can pay any tax due when you file your return. For more information on estimated tax, see Publication 505.
Self-employment tax, or SE tax, is a Social Security and Medicare tax primarily for individuals who are self-employed. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. Since you are both the employee and employer, the rate of tax is approximately 15.3 percent of your net earnings from self-employment.
Lastly, all of the publications mentioned here are more than 50 pages long. Unless you want to spend more time doing accounting and taxes rather than doing what you set out to do, I recommend that you hire a good accountant.
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