Category Archives: Tax Issues

Self-Employment Tax 101 for Small Business Owners

When you’ve made the transition from working for someone else to being your own boss, you gain the freedom to create your own professional path. You also get additional responsibilities, like paying self-employment tax.  

Self-employed individuals are required to not only submit the income tax they owe to the federal, state, and local governments, they must also submit self-employment tax to the IRS. 

Who Is a “Self-Employed Individual”?

The IRS defines a self-employed individual as someone who conducts business as a sole proprietor, independent contractor, member of a partnership, or as someone who otherwise is in business for herself or himself. 

What is Self-Employment Tax?

According to IRS.gov, “Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.”

Employees of a company pay half of their Social Security and Medicare taxes (usually withheld from their wages) and the employer pays the other half. However, as a self-employed individual, a business owner must remit the entire amount. 

Most self-employed persons, because their tax typically isn’t withheld from paychecks, must estimate their self-employment and income tax amounts due and pay them on a quarterly basis. 

Similar to the FICA tax that wage earners working for employers pay, the self-employment tax rate for tax year 2018 is 15.3 percent on the individual’s first $128,400 of net income and then 2.9 percent on net income beyond that. The rate consists of two parts: 12.4 percent for social security and 2.9 percent for Medicare. 

To pay self-employment tax, you must have a Social Security number or an individual taxpayer identification number. Schedule SE (Form 1040) can be used to calculate self-employment tax. 

Self-employed individuals can deduct the employer-equivalent portion (half of the total self-employment tax) in computing their business’s adjusted gross income, reducing the business income subject to income tax.

Tips for Staying on Track with Your Self-Employment Tax

Neglecting to pay your taxes can result in fines and penalties, so it’s critical to stay current. Talk with an accountant and/or tax professional for assistance in understanding your tax obligations. This is especially important with the new tax laws in effect for 2018.

Here are some additional tips for consideration:

And always remember, a SCORE mentor can help you navigate the uncharted territory of being self-employed. You are invited to ask for guidance on all aspects of starting and running your business.

Personal Property Tax: The forgotten tax for many small businesses?

by Joe Heinrich, Volunteer Business Mentor, Seattle SCORE

Most small business owners are perfectly aware of the Federal, Washington and city taxes they are obliged to pay. However, the one that tends to fall through the cracks is the local Personal Property Tax on businesses by the county in which the business is located. This article explains what personal property is, how to self-report a business’s personal property, how the tax is assessed and how much a business may have to pay in Personal Property Tax.

What is “personal property” of a business?

Taxable Personal Property typically includes items used by a company to conduct business. Examples of personal property which may be assessed include furniture, fixtures, electronic equipment, telephones and machinery. Leasehold improvements and leased equipment are also included as personal property. However, personal property does not include property which is attached to a building or to the land which a business owns as that is considered “real property”.

Exempt personal property includes inventory (i.e., items owned to be resold or used as raw materials to products to be manufactured and sold) and vehicles used on the roadways.  Continue reading

What are the qualified business deductions under the Tax Cuts and Jobs Act?

tax deductionsThe Tax Cuts and Jobs Act (TCJA) created a new 20% deduction for pass-through entities. Though the IRS has not fully interpreted the new rules—which won’t go into effect until the 2019 tax season—many of the implications are clear. This article’s companion piece examined what qualifies as a Pass-Through Entity (PTE).

This blog hopefully sheds some light on how PTEs will be impacted by the new law.

Why a Deduction for Pass-Through Entities?

Since their inception, pass-through entities have been a popular choice for entrepreneurs, especially after the 1986 Tax Reform Act (TRA). Better known as President Reagan’s second tax cut, the TRA was passed by Congress to simplify the tax code and adjust the federal tax brackets.  Continue reading

Ask SCORE: How are pass-through entities affected by the Tax Cuts and Jobs Act?

2018 tax lawsThe passage of the Tax Cuts and Jobs Act (TCJA) brought renewed focus upon pass-through entities (PTEs). In spite of their widespread popularity, PTEs are commonly misunderstood. While thought of primarily as small businesses with few employees that generate a fraction of overall business profits, the truth about PTEs tells a very different story.

As it turns out, pass-through entities are the most popular structure in the US, employing millions of workers and churning out billions of dollars in annual revenues.

This article will demystify many of the misconceptions about PTEs and explain how the TCJA will affect these companies—and the US economy—in the future.  Continue reading

Services subject to sales tax in Washington.

From the Washington Department of Revenue website… 

There is a misconception that services are not subject to sales tax. This article clarifies that some services are indeed subject to retail sales tax. Following is a listing of services that are subject to sales tax when provided to consumers.

Construction services (WAC 458-20-170)

  • Constructing and improving new or existing buildings and structures. Installing, repairing, cleaning, improving, constructing and decorating real or personal property for others
  • Cleaning, fumigating, razing or moving structures, including painting and papering, cleaning and repairing furnaces and septic tanks, and snow removal
  • Clearing land and moving earth  Continue reading

Ask SCORE: Is a worker an employee or an independent contractor?

by Joe Heinrich and Guy Towle, SCORE Volunteers

As mentors to SCORE clients, we are often asked by our clients, “Should I hire this person as an employee or engage them as an independent contractor to do the work I have for them?” Often, our immediate response is to suggest the least costly alternative, which is to engage the person as an independent contractor as then the client can avoid all the payroll taxes associated with an employee.

However, this advice does not take into consideration the very restrictive State of Washington statutes as they pertain to the determination of an employee vs. an independent contractor. So, let’s take a look at the applicable law.  Continue reading

Zero cost federal tax deduction — business use of your home.

by Joe Heinrich, Certified SCORE Mentor

Nirvana would be that a small business owner could generate a deduction from her/his business’s taxable income at no cost. Well, that situation is available for many small business owners: the business use of the home deduction. However, not all of small business owners are taking advantage of this deduction due to not knowing about it or fearing that taking the deduction will trigger an IRS audit.

First, the facts. IRS regulations allow a business owner to take a deduction for the business use of the home, provided that the space is used “exclusively and regularly” for business purposes. The space can either be a room, a part of a room, a closet, the basement or garage, or a separate building on the home’s lot.  Continue reading