Welcome to Part III of Taxes for the Telecommuter. Today we’ll focus on further tax information for the Self-Employed individual. Basically, you are considered self-employed if you operate a trade, business or profession, either by yourself or as a partner. You are required to report all earnings for Social Security when you file your federal income tax return. For any net earnings at or exceeding $400 or more in a year, you must complete the following federal tax forms by April 15:

* Form 1040 (U.S. Individual Income Tax Return);
* Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) as appropriate; and
* Schedule SE (Self-Employment Tax).

Self-employment tax (also known simply as SE tax) refers to Social Security and Medicare tax that individuals who work for themselves must pay. SE Tax is similar to the Social Security and Medicare taxes that are calculated and withheld from the pay of the common wage earner. How much SE tax you owe can be figured out yourself by using the Schedule SE form. Unlike common wage earners who cannot deduct Social Security and Medicare taxes, the self-employed can deduct HALF of his/her SE tax in figuring his/her adjusted gross income - a deduction that only affects your income tax. This deduction must be taken from your gross income, and cannot be an itemized deduction. It is to not be listed on your Schedule C form either.

What about the SE tax rate? The self-employment tax rate is presently at 15.3% for income up to $97,500. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). e Social Security tax rate for 2007 is 15.3 percent on self-employment income up to $97,500. If your net earnings exceed $97,500, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings.

An accountant may advise you to pay your income taxes on a quarterly basis if you are self-employed - as opposed to paying in full at the end of the tax year period (which may result in a penalty). While all of this self employment tax information may sound daunting, at least know that the self-employed individual is also able to deduct several different expenses related to his or her business. These include the cost of travel required by your business, office supplies, telephone bills, office rent and expenses for the business use of your car. If you work from home, you may be able to qualify for the home-office deduction. You can also take a depreciation deduction for assets you use in your business, such as computers, printers, or other equipment. Other deductions for the self-employed include the aforementioned 50% of self-employment tax, as well as 50% of the cost of meals and entertainment, and attorney and accounting fees that are directly related to your business. You can deduct 100% of your self-employed health insurance premiums as an adjustment to income, and even can open a specialized retirement plan and deduct your qualified contributions.

I understand this is a lot of information to take in, and it may confuse some. Again you are advised to speak directly to your accountant or tax preparation professional on all of the above, but if you have any additional questions or comments that you would like to see discussed on the DailyTelecommuter Blog, please just drop me a line!

Starting Wednesday, I will introduce some cool tips and info on marketing yourself and/or your home-based business!

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