Info on part-time business

midnight · #1 (**permalink**) 01-04-2006, 08:21 AM

Can someone give me the details and reasons that starting a second income / home business is supposedly such a great idea?

DivaJen · #2 (**permalink**) 01-04-2006, 10:46 AM

There are many things that can be written off of your taxes, and I believe you can show losses for five years as long as you show intent to make money off your business. DH and I write off our DSL and cell phones, to name two expenses, along with office supplies as needed, computer equipment, etc.

And when you're making a profit, that's a good thing too.

Fern · #3 (**permalink**) 01-04-2006, 10:59 AM

Pros: Write off various expenses, such as divajen outlined above.
Cons: Self-employment tax is very high.
Cons: You will pay more for health insurance, ESPECIALLY if you have a pre-existing conditon that requires treatment or meds.

Pros: You save on commuting cost (gasoline and car wear and tear and even car insurance which is higher depending on average # of miles driven daily)

Less stress from commuting

More time for doing other things

Cons: If your service/product is considered taxable by your state tax commissionS, you'll have to start filing state tax forms You'll also have to file quarterly income tax payments for both state and federal. More paperwork is a headache.

Cons: In CT at least, if you want to make claim to your own business name,which you purchase online with feds, your town will find out about it and begin to tax you for the home-based business.

sweeps · #4 (**permalink**) 01-04-2006, 11:08 AM

It should be mentioned that you can only write off expenses that were used for the business. For example, if you use your DSL and phone line 25% of the time for business use and 75% for personal use, you can only (legally) write off 25% of the expense.

Optsol · #5 (**permalink**) 01-04-2006, 12:21 PM

You can usually write off more than the self employment tax -- I find they balance themselves out.

If this is a 2nd income, I assume you have insurance already, but you can deduct it if you need it.

Most importantly.... SEP-IRAs... 25% of your net income is fed tax deductible. up to 43,000 a year -- none of this 3k, 4k crap.

DivaJen · #6 (**permalink**) 01-04-2006, 02:31 PM

Quote:

Originally Posted by Optsol

If this is a 2nd income, I assume you have insurance already, but you can deduct it if you need it.

I agree - when we were completely self-employed, we paid A LOT for our health insurance. It was miserable, and the coverage wasn't even that good.

Optsol · #7 (**permalink**) 01-04-2006, 02:32 PM

At least it's fully deductible now.... at least it's what I tell myself to stem the pain of writing the quarterly check....

where is my advil!

jmjj215 · #8 (**permalink**) 01-05-2006, 08:25 AM

Quote:

More time for doing other things

That depends on the business. My side business is extremely time consuming. I'd hate to calc the hourly wage.

Beware of the home office deduction - that's a big IRS flag.

To avoid (not evade) a lot of the self-employment tax you can incorporate as an S corp. Then you pay yourself a salary, which is self-employment taxable. Any extra profit flows through to you w/o the self-employment tax. Just make sure your salary is "reasonable" (and that's up for you to decide, but another big audit flag is to pay yourself a very low salary to avoid most of the SE tax).

Quote:

Most importantly.... SEP-IRAs... 25% of your net income is fed tax deductible. up to 43,000 a year -- none of this 3k, 4k crap.

I'll have to look into that a bit.

Optsol · #9 (**permalink**) 01-05-2006, 09:31 AM

I'm pretty sure you lose the SEP if you S-corp, because you're a W2 person then.

For my bracket, the SEP advantages blow away the SE tax.

debtfreeme · #10 (**permalink**) 01-05-2006, 05:08 PM

I am trying to figure out a hoem based business i can do. Seem to be struggling on my strengths though!

midnight · #11 (**permalink**) 01-06-2006, 08:00 AM

Thank you all for the information. It's still a bit confusing for me, but a good start in the learning process. I assume that those of you who are doing it would recommend it?

Optsol · #12 (**permalink**) 01-06-2006, 08:03 AM

Highly recommended.

Obviously, you want to find something that is low-cost/no-cost to start, and let your sales drive your growth spending.

jmjj215 · #13 (**permalink**) 01-06-2006, 11:01 PM

Quote:

Originally Posted by Optsol

Highly recommended.

Obviously, you want to find something that is low-cost/no-cost to start, and let your sales drive your growth spending.

I totally agree. The beauty of the internet is the fact that knowledge and application of that knowledge is still key. Capital requirements are very, very small.

Optsol, thanks for the heads up on the loss of the SEP with the S Corp. Perhaps I should just dump into it and take that huge deduction. Are there any specifics I should know about when setting up a SEP?

Optsol · #14 (**permalink**) 01-07-2006, 08:24 AM

It's the simplest (to start and to maintain) of self-employed retrirement options. It's just like opening an ira, but with an extra form (5305 -- IIRC).
All the usual suspects (brokerage houses, banks, etc...) offer them.

Aside from the SE aspects (potential large yearly contributions), and the extra form(one shot fill-out), they behave the same as a traditional ira.

Before you jump in though -- the core limitation is that the contribution is based on a % of your SE income, unlike traditional & roth.

Traditional & roth, if you make 3000, you can put in all 3000
SEP, if you net 3000, you can only put in 600 (=25% of your after-deducted earnings)

So if you are starting small, you may wish to stay with the conventional IRAs. When you get to the point where 25% of your after deducted net exceeds the traditional IRA limit, or if your total income limits your IRA contributions, then the SEP is for you.

If any of this isn't clear, please post, I'll try to improve it.

CheaplyClever · #15 (**permalink**) 01-08-2006, 06:24 PM

Debtfreeme- I agree with you. I'd love to have a home-based business, but I don't have any idea what kind of business I'd be doing.

What do some of you do?

jmjj215 · #16 (**permalink**) 01-09-2006, 10:32 AM

Optsol, thanks for the advice. Is the SEP deduction deductible BEFORE you calculate SE taxes? I would think not, but here's to hoping.

jmjj215 · #17 (**permalink**) 01-09-2006, 03:19 PM

Okay, been doing some reading on irs.gov and it looks like they have a special computation for SE individuals to figure out the max contribution - and that SE tax is paid on SE income before the SEP deduction.

Optsol · #18 (**permalink**) 01-09-2006, 04:37 PM

Sorry for the late response.

Yes, you pay the SE tax the net profits from your business (sched C output)

The SEP deduction is for Federal tax only. (it affects your agi).

sweeps · #19 (**permalink**) 01-09-2006, 06:45 PM

Quote:

Originally Posted by jmjj215

Okay, been doing some reading on irs.gov

Hey Jesse, I thought you avoid that site like the plague?

jmjj215 · #20 (**permalink**) 01-10-2006, 05:40 AM

Quote:

Originally Posted by Sweepsplayer

Hey Jesse, I thought you avoid that site like the plague?

Perhaps I should edit it and say some "forced reading." Keep in mind, I did keep a trash can by my desk 'just in case' I felt the need to..eh..lose my lunch.