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Block Advisors Helps Small Business Owners Understand And Anticipate Tax Surprises

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Block Advisors Helps Small Business Owners Understand And Anticipate Tax Surprises

There are more than 28 million small businesses in the United States. New sharing economy opportunities like Airbnb and Uber, and even self-employment gigs let people become their own boss. Some side hustlers or gig economy workers may not realize they are small-business owners. While owning a small business offers many positives – like freedom from having a boss and the ability to set their own schedule – there are unintended tax consequences with small business taxes. A year-round tax advisor can help taxpayers understand and anticipate these surprises.

Paying income tax alone isn’t enough as small business owners owe self-employment tax

Small business owners may be surprised when filing their tax return for the first time, that in addition to income taxes, they owe another 15.3 percent in self-employment tax on their net self-employment income. While employees and employers share the burden of Social Security and Medicare taxes equally by paying 7.65 percent each, a self-employed individual must pay the full amount.

Paying the IRS becomes a quarterly event with estimated tax payments

Another difficulty is that small business owners don’t have taxes withheld from a paycheck like traditional employees. Generally, if they expect to have a tax liability of at least $1,000, they must send tax payments each quarter to the IRS. Not knowing or forgetting about quarterly estimated tax payments may result in a significant tax balance and penalties.

Home office use matters on the tax return

The area designated as a home office must be used only for the taxpayer’s trade or business. This means that if they do their work on the kitchen table that their family also eats at every night, they won’t qualify for the home office deduction. Although the office “space” doesn’t need to be separated by a permanent partition, like a wall, it does need to be an area separate from personal use.

Tax reform impacts everyone and gives a 20 percent deduction to small business owners

The new tax reform law is like a life event. It’s not just a tax rate change or a bigger child tax benefit. It’s going to change the way taxpayers think about and plan their income taxes. They’ll need to take a fresh look at their individual situations to know their outcome and new strategies to use to get the best tax outcome.

Eligible businesses will get a 20 percent deduction off their net income as long as they meet certain rules around their income and type of business. They don't have to spend money to get this deduction. Most deductions are 1:1 for what a small business owner spends, but this this deduction is an extra 20 percent off their profit even after deducting all their business expenses.

Taxpayers who have questions or need help can get matched with a tax advisor online.

Catherine Varosy, Enrolled Agent and master tax advisor, is authorized by the Internal Revenue Service to represent taxpayers in IRS audits. When she isn't preparing business tax returns, she's offering tax resolution services year round to small business owners with complex tax issues and teaching classes to her peers about how to prepare accurate tax returns.

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