self employment

Will There Be More IRS Audits Under the New Tax Law?

March 2, 2018 By Jackie Cohen Leave a Comment

The Internal Revenue Service has had its hands full trying to implement the Tax Cuts and Jobs Act in time for the current filing season — the changes kick in for this April 15 deadline, not next year’s returns. So is the agency going to be too busy to have time to perform as many audits as it has in the past? Or will it be more forgiving about mistakes by taxpayers, accountants — and even possible bugs in the software used for filing due to all the last-minute changes being implemented?

Let’s back up a minute. The way people talk about audits makes them sound like they’re always punitive. They’re not. The IRS simply double checks numbers because of the gap between what it receives in payments and what records suggest the agency is owed.

The IRS audits seven out of every 1,000 tax returns — and while some them are triggered randomly, others result from things the agency considers to be red flags.

Wealthy Scrutinized Most

Although people in every single tax bracket get audited, the agency scrutinizes the wealthy to a far greater extent than anyone else.

People who report no income also have a greater chance of being audited — that is, people who claim enough expenses to result in a net loss or no gain for the year.

While this was already true for the self-employed before the enactment of the Tax Cuts and Jobs Act, with the wording of the provisions for self-employment taxes challenging even tax professionals, it remains to be seen whether

What Triggers an IRS Audit

Beware of slipping any of the following things into your tax return, because they increase your chances of being audited:

Claiming a home office
Under-reporting income
Too many charitable donations
Too many work expenses
Perfectly rounded numbers
Math errors

If your tax return is completely truthful, you have nothing to worry about in an audit. Make sure that you maintain detailed records to substantiate the expenses and deductions you claim on your return.

Measure Your Home Office

But if, for instance, you claim space as a home office but also use the area for other things, that’s something to watch out for; another problem with this is overstating the size of a home office. The IRS has sent agents equipped with tape measures to calculate whether the claimed amounts for home offices match up with reality.

Who Gets Audited

2015 Adjusted Gross Income	% Filed	% Audited
Negative to none reported	1.70	3.25
$1 to $24,999	37.45	0.80
$25,000 to $49,999	23.21	0.49
$50,000 to $74,999	13.20	0.41
$75,000 to $99,999	8.52	0.52
$100,000 to $199,999	11.72	0.62
$200,000 to $499,999	3.38	1.01
$500,000 to $999,999	0.54	2.06
$1,000,000 to $4,999,999	0.25	4.60
$5,000,000 to $9,999,999	0.02	10.46
$10,000,000 or more	0.01	18.79
All returns	100.0	0.70

Similarly, if you list something as a business expense but actually use the item for personal reasons, that could be a problem — retain all of the receipts that you claim on your return.
If anything, this has gained importance following the changes in the new tax law, which unfortunately contains a confusing cap on expense reporting by those who file as self-employed.

(For those who file as self-employed, only 20% of income may be deducted as expenses, and after that all income is taxable at the individual rate rather than as the self-employed rate, except that this phases out at a rather high income level; if the individual files to incorporate him or herself, that cap becomes a non-issue, but that paperwork needed to have been filed by the end of 2017 to apply to the coming tax deadline.)

Hire an Accountant

Long story short, if you have any kind of worry about possible tax audits, hopefully you are already working with an accountant on your taxes — it’s never too late to hire one.

Although some tax filing software includes a premium service option where a human tax professional double checks your returns, don’t construe that as insurance against being audited.

If for some reason you do receive a letter indicating the IRS wants to audit you, read it carefully and then head to the agency’s website to learn more — like the list of documents you need to prepare.

Readers, what concerns do you have about this coming tax deadline? Have you filed your taxes already — and what kind of advice are you hearing from your accountant?

23 Advantages of Self-Employment

September 25, 2015 By Alexa Mason 1 Comment

More and more we’re hearing that people are taking the leap into self-employment. While there are a number of disadvantages to self-employment many people cite a number of advantages to self-employment. Here is a list of 23 of those advantages.

• Many people who shift to self-employment state that an increased level of flexibility is the biggest reason why they take the leap. We will call this “life-flexibility.”
• Self-employed people are in control of their own raises. Basically, people are able to pitch or contract work with increasing rates of compensation if they so choose. There is no longer the need to go through a year of work, get reviewed by your supervisor and then see if you get a 3% cost of living raise.
• You have creative control over what you’re doing.
• Self-employed people can create the best job for their personality.
• Self-employed people often mention that they switched to working for themselves because it’s easier to care for their children. If they have a sick toddler, they are able to better manage that situation.
• You have the energy to clean your home more often!
• Depending on the type of business that you’re doing, you can volunteer much more easily.
• Work Life Balance is more easily achieved because you dictate how your day will go.
• The ability to actively network with people who will help further your business.
• Self-employed people can better manage their health and take time out of their day to exercise.
• If your business is virtual, you can work from wherever you’re based in the world-as long as you have a decent internet connection.
• You can help out your aging parents during the day
• You can help a friend during an emergency.
• Diversify income streams. Even in a bricks and mortar business there are numerous ways people are able to grow their business.
• When you are self-employed you can work more, which hopefully equates to earning more money.
• Likewise, you can decide to work less!
• You’re able to do your laundry and actually put it away immediately.
• Tend your garden, or do yard work.
• Go to classes and further your education.
• Better manage the problems that come up during daily life. If you need to have the plumber visit, get cable installed, or any other service that tells customers that there is a 4 hour window for when the service provider will arrive.
• You can go to your child’s school and volunteer.
• You can go to your child’s school when there is a problem.
• You can spend time with your pets.

There a number of disadvantages to working for yourself: cash flow problems, the continuous work of finding business, and the need for self-employed people to manage all of the different pieces of running a business. After looking at this list many people can see why self-employment is appealing to some people.

Dealing With Financial Fear

May 14, 2012 By Jennifer Derrick 1 Comment

Years ago when I was first thinking about self-employment, one thing scared me above all others. Taxes. It sounds silly, but I was terrified of screwing it all up and ending up in jail. Estimated taxes, quarterly payments, and self-employment deductions freaked me out so badly that it almost seemed better to stay employed with a company and let them handle it. Almost. Fortunately I overcame my fear and went out on my own. As I’ve not landed in jail yet, I must be doing something right.

I know I’m not the only one who’s ever been scared of some aspect of finance. Taxes scare plenty of people. Many people refuse to invest because they’re afraid of losing all their money. Some people are afraid to buy property. Others are afraid of starting a business. Finances can be scary because there can be a lot a stake. It’s easy to imagine all kinds of worst case scenarios where you lose everything, end up in jail, or end up the victim of a scam.

At the root of most of this fear, though, is a lack of education. What scares people about money is usually what they don’t know or understand. That’s actually good news because it’s something you can deal with and overcome. In my case, I didn’t know anything about taxes for the self-employed, beyond a few horror stories I’d heard in the media and from some other self-employed friends. However, once I took the time to sit down and educate myself, I realized that it wasn’t as bad as I’d feared.

I’d scared myself senseless over something silly. Are my taxes more complicated now? Yes. But with the help of TurboTax, the IRS website, and other helpful information, it’s not as difficult or scary as I’d feared. I get through it every year and I enjoy self-employment so much that I can’t believe I almost talked myself out of it, simply because I didn’t even know what I was dealing with. If you’re living in fear of something financial, here are some helpful tips to help you get past the fear and get on with making a better financial life.

Educate Yourself

Whatever you’re afraid of can probably be demystified with some good education. Read some books and reputable websites on the topic that’s scaring you. Take a class. (The fee for the class will be well worth it if you come out less terrified of money.) Or, talk to someone like a reputable attorney, accountant, or financial planner who will take the time to explain what you need to know.

Start Small

I had some idea that I would be dealing with so much money in my first year of self-employment that I’d never sort out the tax mess. Ha! The first few years I had so little income and deductions that it was easy to deal with. Each year I’ve added on a little bit more complexity, but because I’m acclimated, it never becomes too much. Whatever you’re worried about, deal with it by starting small. If you’re scared of investing, buy one stock or fund and see how it goes before adding on another. You don’t have to jump in with a sizable portfolio. If you’re afraid of starting a business, start by simply doing some side work while you’re still full-time employed so you get the hang of things slowly. Starting small gives you time to learn before you commit too many resources to something that won’t work.

Realize Most Things Can Be Fixed

I finally realized that even if I screwed up my taxes beyond belief, I probably wouldn’t go to jail. Mistakes can be fixed. As long as I wasn’t intentionally trying to defraud the IRS and as long as I was honest about any mistakes, I’d likely only have to pay the difference plus penalties and go on with my life. It’s the same with almost any financial endeavor. A bad investment can be sold. Sure, you might take a loss but if you’ve started small you won’t lose all your money. If you start a business and it doesn’t work out, you can close it down. You might take some losses, but you probably won’t lose everything. Rarely does the worst case scenario happen.

Take Your Best Shot

Sometimes you just have to try, regardless of fear. You can educate yourself so that you understand what you’re getting into and you can start small, but at some point you just have to jump in. You don’t want to get into something you don’t understand or that might put you in financial jeopardy, but if the thing you fear is something you really want to do, you’re just going to have to do it.

I’ve always been glad that I dealt with my fear of self-employment taxes. I wouldn’t trade self-employment for an office job any day. Had I let my fear rule me, I would have stayed in the safe job and I wold have missed out on a fascinating and challenging career. I still get the heebie-jeebies sometimes in April, right before I hit “Submit” on that tax form, but I know I’ve done my best and that the rest will take care of itself.

(Photo courtesy of epSos.de)

Common Misconceptions About Working From Home

February 23, 2012 By Jennifer Derrick 5 Comments

When most people tell me they want to work from home, I can tell they have an idealized vision of what it will be like. They’re envisioning total creative freedom, not having to commute or pay for child care, and the ability to wear whatever they want and work whenever they want. They’ve bought in to some of the most common misconceptions about working from home. While there is a bit more freedom and some hassles become less bothersome than in a traditional office job, working from home is not as perfect as many envision it to be. If you go into it expecting nothing but fun and freedom, you’re going to be disappointed. Here are some of the common misconceptions people have about what working from home is like.

Misconception: I’ll never have to leave home because I can do all of my work from home

Very few jobs are truly work from home all the time. Many jobs where you work from home still require you to go out and call on clients, take meetings, and deliver products. There is almost nothing that will allow you to stay home all of the time. While you will likely reduce your commuting and the associated costs considerably, you probably won’t be able to stay home all the time.

Misconception: I can completely eliminate child care

If you’re seeking to work from home so you can be with the kids, remember that you will likely need to get rid of the kids at some point. This may mean sending them to daycare, hiring a sitter or having a spouse that can watch them. It just isn’t professional to have kids screaming and demanding your attention in the background while you’re on a call with a client. It’s distracting to have the kids playing and making a ruckus while you’re trying to concentrate on your work. It’s also unprofessional to bring them with you to meetings. Unless you’re running something like a daycare, working from home will likely not absolve you from paying for childcare.

Misconception: Working from home will be easy

Working from home is still work. Even if you enjoy what you do, it’s still work. It’s work to get clients, bill clients, and market yourself, and that doesn’t include doing the actual work you’re being paid for. Many people who work from home end up working more hours than people who work in offices. That’s because you’re responsible for everything when you work from home. There are no assistants or other departments to help with your workload. Working from home is still work, so give up the idea that you’ll only have to work an hour a day.

Misconception: I can set my own hours

To some extent yes, you can set your own hours. If you want to work on your marketing brochure at 2 a.m., you can do that. However, if you want to be competitive, you’ll have to work when your clients work, too. You’ll have to be available to make and take calls when your clients are at work. If you do something like photography, you’ll have to show up when the wedding is scheduled, not when you want to show up. If your business requires you to interact with people, you have to be available during the hours that they need you. You can’t just say, “Well, I don’t work during that time,” and expect to last very long in the business world.

Misconception: I can stop buying expensive work clothes

While the notion of working in your PJ’s is appealing, it’s not often the truth. You might not have to buy as many work clothes as you did when you had an office job, but you’re still going to need professional clothes to wear when you go out to meet clients or suppliers. Also, you might have clients who want to videoconference with you and wearing your grungy clothes isn’t going to cut it. You’ll still have to buy some decent clothes.

Misconception: I’ll love it

You might. Or you might hate it. People who love working from home must also love a certain degree of isolation. There’s no one else to talk to, unless it’s a client. There are no water cooler conversations or lunches with the gang. You also have to be disciplined enough to ignore the TV, chores, phone calls from friends, the Internet, and all the other things at home that compete for your attention. If you can’t do that, you won’t make money. If you’re a salaried employee you might be able to get by with a certain amount of slacking off and still get paid. When you work from home, you don’t get paid if you slack. Working from home isn’t for everyone and more than a few who try it end up back in office jobs.

Misconception: I’ll make a ton of money

Don’t believe the infomercials. You aren’t going to get rich working an hour a day. When you work at home, you have to pay your own taxes, buy your own insurance (if you don’t have a spouse’s policy that you can use), buy your own equipment, pay your utilities, pay any applicable licensing or registration fees, and pay for all of your own marketing. That is going to eat into your profits. Unless you manage to patent some wonderful idea or you have a job with a super-high wage, you’re not going to become rich overnight. You’re going to have to carefully manage your expenses and work hard to attract clients who will pay your bills. Then you’re going to have to put in a lot of hours turning out fabulous products or services to keep those clients coming back for more.

Misconception: It’s cheap to start a home based business

There are some businesses that can be started with nothing more than a computer, Internet access, and some great word of mouth. However, many businesses require a substantial investment in supplies and equipment. Even something that seems simple like cake decorating requires you to buy the equipment and supplies, have your kitchen certified for commercial use (or buy/rent space in such a facility), pay your city or county for a business registration, pay for marketing materials/photography to create a portfolio for your clients to view, and so on. If you want to buy into a franchise or start something that requires additional education, training, or certification, you can be looking at many thousands of dollars.

Misconception: I can start tomorrow

While you could maybe quit your job and start your business tomorrow, remember that it will be a while before you start turning a profit. Unless you have substantial savings to see you through, you’re better off starting slowly, while you’re still employed. Start taking side jobs and slowly acquiring the equipment you need. Work on your business plan and make sure you understand exactly what you’ll need to do to handle things like taxes and legal issues. Starting slowly can make things go much more smoothly for you.

Misconception: I won’t have to do anything I don’t want to do

On the contrary, you’ll have to do lots of things you don’t want to do. If you don’t like marketing, paying bills, managing a budget, collecting late payments, or making sales calls, tough luck. Unless you have the money to hire someone, you’ll be doing all of this and more. You won’t be able to just focus on the parts of the job that you love.

Misconception: I won’t have to answer to anyone

You’ll find yourself answering to a lot more people than you ever did in a regular job. In a regular job, you have to answer to maybe one or two managers or bosses. When you’re on your own, you answer to your clients, suppliers, anyone who lends you money, government regulators, and anyone (like a spouse or partner) who has a stake in your business.

Misconception: I’ll have lots of free time

The idea that you can go on vacation whenever you want and that you’ll have plenty of time to pursue all those hobbies you never get around to is false. Since you have to do your job plus all of the other things required to run a business, you’ll likely find that you have even less free time. When you do go on vacation, you’ll likely still have to keep in touch with your clients and do some work. Unless you set out to create a specifically part-time venture, you’ll be working more hours than you probably are now.

Misconception: I’ll have more time for family and friends

See the above misconception about having lots of free time. Plus, even if you do find yourself suddenly free on weekday afternoon, everyone else is probably at work or school, anyway.

Misconception: I won’t have to deal with criticism or petty inter-office jealousies

You and your work will be criticized by clients and others who have a stake in your venture. You will have to deal with petty jealousy from people who think you have it easy or that you don’t do any “real” work. If you work from home for a traditional company, you’ll have people who are still in the office wondering why you’re so special. There will be times where you get halfway through a project only to find that it gets cancelled because someone higher up the chain decided to stomp on someone else’s pet project. It won’t be your fault, but you’ll still be caught in the middle of the inter-office politics. Working form home does not make all the criticism and pettiness go away.

Misconception: I’ll have total creative or artistic freedom

I hear this more from people who want to pursue writing-related or artistic businesses. They think that they’ll be able to turn out whatever their muse comes up with. The truth is that you will have to adhere to the vision, budget, and requirements that your client has for the project. You may be able to suggest certain things or present some different ideas, but it will be nothing close to total artistic freedom.

Working from home can be very rewarding. I’ve enjoyed it for many years. However, you have to be realistic about what the experience will be like. Even if you are at home, work is still work and it’s not fun all the time. You’ll have to do things you don’t like and the freedom and riches you think you’ll have likely won’t materialize. You may also hate being alone. If, in spite of all of this, you can still find enjoyment in Working from home, you’ll likely succeed and find it to be a rewarding and challenging experience. If not, you can always go back to the, “real world.”

(Photo courtesy of emilydickinsonridesabmx)

Starting My Own Business

October 8, 2009 By David G. Mitchell 14 Comments

After close to thirty years of working for other people, I have finally decided to hang out a shingle on my own. For some people, self-employment is a natural extension of who they are. For me, as I insist on the possibility of great success in anything I undertake, the decision to go into business for myself took a lot of soul searching, discussion and research.

In the current economic climate, a lot of us are faced with the need to create opportunity for ourselves. Until quite recently, I was a senior executive at a division of a large, publicly traded company. When my company merged out of existence, I took some time off in order to regenerate and to pursue new business opportunities. When those opportunities failed to materialize, I began looking for the security of new employment. Unfortunately, the past twelve months have not been the best of times for job seekers, even for well qualified job seekers.

Although I did not find work in the past twelve months, I did find that I was turning away a large number of opportunities to work as a contractor. Last week, after turning away a fellow I know for the fourth time this year, it dawned on me that I needed to take a deep breath and explore self-employment. After all, I reasoned, my Dad was self-employed before he retired. My wife’s parents were self-employed. Indeed, the busiest people I know in today’s workforce are self-employed. Why shouldn’t I just open a business on my own?

Having at least opened the door to self-employment, I made a plan so that I could assess the viability of such a venture. I determined that I did not need a business plan, at least initially, but that I did need to know that there was a need for my services and that I could afford to work on my own. With that in mind, I determined that I needed to explore the following:

Will I Have Clients? It does not matter how highly skilled you are if you do not truly believe that you can attract clients. One fellow I know is doing minimal marketing for his business and relies only on traffic generated by his website, which is completely passive. I called a few of my business contacts to discuss their need for my services and found that they were far more receptive to paying me directly than they would have been if I had taken a job with a bigger company. They all quickly recognized that the value that they would get from me at my personal hourly rate was far better than the value that they would get if they had to pay the “going rate” charged by any company that would employ me. (For me, the “going rate” for my services would be between $300 and $600 per hour. One of the business people I contacted is paying close to $1000 per hour for services comparable to those that I would provide. I will likely charge about $200 per hour.)

Will my Spouse be Supportive of My Decision? In going into business for oneself, it is important that the decision be made with the full support of one’s spouse, especially for people who will be working from home. After I established that I think I will quickly have clients, I then approached my wife to make sure that she agreed that my decision was a good one. That allowed me to turn “My Decision” into “Our Decision.” That will do wonders for my piece of mind!

What Do I Need To Do To Start a Business? Having decided that I would start a business, I then needed to establish what that means. For people in regulated industries, there will be regulations that require compliance. Most people will also have to obtain local licenses. There is also the issue of forming an appropriate business entity and determining the best way to deal with tax issues. I suggest consulting with an attorney, an accountant and an insurance provider, at the very least in order to ensure that you have all of the necessary data on which to base a business. If you are part of a professional organization or association, you should also check with the organization or association to determine whether it offers any guidance.

Those are the three steps that I have taken so far. My goal is to establish my business within the next week and to start generating revenue within the next month. I shall periodically write about my experience as a small business owner on these pages and I hope that we can have a good dialogue about the pros and cons of business ownership.

How many of my readers are exploring business ownership as a way to stay ahead, or even just to catch up, in our current economy? Have you ever started your own business? What experiences can you share with us? What have you learned from your experiences?

White Bread & Green Dough or How I Opened an Online Bakery

October 21, 2008 By M. Beddingfield 13 Comments

At the beginning of this year, I was looking for a way to supplement our income. I do seasonal data processing and the spring season had not yet begun. I had prior experience with selling handmade jewelry on the internet and had all ready decided that I wanted to use the internet for my venue. I knew I didn’t want to sell jewelry or any other type of women’s accessory or craft. I needed something that would sell reasonably quickly and that wasn’t being done to death by everyone else.

I made a list of what I can do well, sort of a resume. I listed my past experiences and abilities. Then I started researching online. After looking at literally hundreds of websites, I came up with two possibilities. One was typing and secretarial work, the other was baking. I have a long history of doing both. I all ready had a typing sort of job and wanted something different, so I chose to open an online bakery.

My first step was to draw up a short term business plan. Initially, I wanted to sell online as well as deliver to businesses in my small town. Once I factored in the cost and the fact that this would be a one woman show, the business plan helped me to realize that deliveries might not be such a great idea starting out. I would begin by concentrating on online sales.

I had to decide if I wanted to run the bakery out of my home or rent a kitchen. To keep the initial costs as low as possible, I knew I wanted to run the bakery from my home. So I checked the laws in my state and found that this was doable. I just had to dedicate a space for the bakery supplies and have a separate refrigerator.

The next step was to check the zoning codes for my rental home. I knew I was in a residential neighborhood and would probably need to be rezoned. I went to city hall and talked to the county clerk. She set me up with a meeting of the zoning board. I met with the members of the zoning board and told them what I wanted to do. I think it helped that I baked them some of my super delicious cookies because they approved my request. I had to pay a $50 rezoning fee and everything was good to go.

Next, I got my city and county licenses. That was the easy part. The cost was $45 for both of them.

Since I have previously owned a deli, I knew that the Health Department would want to inspect my kitchen. I called the county health inspector and found out some interesting information. I would not be under the Health Department, but instead would be considered a domestic kitchen, which is under the Department of Agriculture. So I called them. They said I had to attend a food safety class and pass a test to become a certified domestic kitchen. They scheduled me for the next class. The test would cost $100. They also sent me a large packet of paperwork to read. It was quite educational. I learned that I could only prepare and sell non-hazardous food products and that most of my bakery items would fall under that category. I also learned how to correctly weigh and label my products to conform to the state laws.

While I was waiting for the class and certification, I worked on my website and my menu. For the menu I had to adhere to the strict regulations for non-hazardous food products. That meant that I couldn’t sell anything like cheesecakes or anything with partially cooked eggs and dairy. That wasn’t a problem as I was planning on selling mostly hand-kneaded specialty breads and gourmet cookies. I took my time deciding exactly where I wanted to sell my products. I thought about opening my own website, but while I can do basic HTML, I’m not up to par on building a shopping cart and maintaining a complicated site. Also, it takes time for traffic to flow into a new website and I wanted to be up and running as soon as possible. I decided to use a sort of internet mall. I looked at probably fifty or more sites before deciding to use ETSY. They had the look and feel that I was looking for and I could build an almost immediate website. They had payment options and also used PayPal for their shopping cart. I could write my own detailed descriptions, use my own photos, (up to 5 per item) and their fees were very reasonable.

One of the last things I did before my opening day was to have a talk with the folks at the local post office. I had never dealt with shipping perishable items before. They were very helpful and guided me to their online website. I found out I could get free priority mail shipping boxes from them and print my shipping labels online. That worked out well and kept my shipping costs in line.

On the weekend before my opening day, I bought all my baking supplies and tried out a few new recipes. I practiced taking pictures of my products and wrote product descriptions. Then before I knew it, I was open for business.

Within a week, I had my first few sales. In less than a month, I had over 100 sales. Keep in mind that a sale might consist of several items, such as 2 loaves of bread, a batch of brownies and a dozen cookies. Orders were coming in from all over the United States. I even sold one order to England, but the shipping price was very high on it. My little kitchen had become a very busy place!

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