By Eva Rosenberg
Another business year. Same president and Congress. Don't expect brave new tax laws for the self-employed. But do take action now if you want to reduce the federal tax bite at the end of 1997. You could cut your taxes in half -- legally.
Hire your children and spouse to file, make copies or clean your office. Wages to your children are fully tax deductible. Allowances aren't. You don't need to pay Social Security taxes for children under 18, and no federal unemployment taxes are assessed if they are under 21. If your family workers use the car to run business errands, make sure they submit mileage reports. Reimburse them based on the standard IRS mileage rate (31 cents in 1996). It's a deductible expense for you, and it's tax free money for them.
The health insurance you're already buying for your children, your spouse and yourself may be 100-percent tax deductible as a business expense if your spouse is active in your business. Call the BizPlan folks at 1-800-597-0453 to find out more about this tax-saving program. This is not an advertisement for BizPlan -- it's sound advice.
Buy an IRA for your child. You can deduct up to $2,000 a year from your tax bill now and put savings away for a college education later.
You're likely to lose the deduction for wages paid to employees if those workers don't have Social Security numbers. So verify those numbers now. Make copies of employees' cards and their driver's licenses and attach them to an I-9 form. Driver's licenses verify identity and ensure that your employees are not illegal immigrants. Also, get Social Security numbers for your children, otherwise, you won't be able to deduct their wages from your tax bill or claim them as dependents.
Need employees? Look into the work opportunity credit. You may be eligible for a credit of up to $2,100 per employee if you hire someone from seven targeted groups, including veterans, qualified food stamp recipients and high-risk youth, among others.
Develop a functional bookkeeping system today, before you get too far into the year. Not having a computer is no excuse. Look at Big E-Z Bookkeeping® for manual systems or choose from many computer bookkeeping applications.
Create logs for business use of your computer, home telephone, cell phone and fax. Look at every piece of equipment that does double duty as a personal tool and as a business tool. Write down the amount of time you spend using each tool for business purposes. When you use your car for business, write down the number of miles you travel every time. At the end of the year, you'll be able to deduct the business-use percentage of all these items -- prorated, sorry to say. Written documentation, in the form of logs, will allow the IRS to confirm that you're not deducting the personal-use portion of mixed-use assets.
Get a portable filing system -- an accordion file will do. Label each pocket for business expenses, such as parking, office supplies, pay phones, tolls, tips and taxi cabs. Keep it in your car or put it in your briefcase. File all cash receipts as you get them. Use slips of paper for expenses like tips that don't provide receipts. You'd be surprised how much you underestimate your out-of-pocket expenses. Filing receipts as you go saves you money as well as time.
Carrying high interest charges on a credit card you use jointly for business and personal purchases doesn't make good tax sense. The interest isn't tax deductible. Instead, designate a separate credit card for business use only. If you can't pay off the balances on your cards, let the interest accumulate on the business credit card and pay the balances on your personal cards first. The interest on the business-only credit card is tax deductible.
Get Form W-9 on file now for contractors who perform services for your business. This includes consultants, attorneys, janitors and any other free-lance help who are not incorporated. Even partnerships should fill out a W-9. At the end of the year, use those W-9s to prepare 1099 forms for anyone who has been paid $600 or more. Without 1099s, you're likely to lose tax deductions for payments to contractors and free-lancers.
Ideally, you should have a contractor fill out a W-9 before you sign the first check. If you don't have completed W-9s, send a copy of the form to the last address you have on file for that person. Also include a cover letter requesting that he or she provide a Social Security number or federal identification number and full contact information. If you expect to get no response, send the W-9 and cover letter with return receipt requested. This will provide proof that you tried to get a contractor's identification number and will help you avoid possible IRS penalties if you prepare a 1099 without a Social Security number or federal identification number.
Eva Rosenberg, MBA, is an Enrolled Agent in Encino, Calif. She is a sought-after speaker on tax and small-business issues. Her practice focuses on small business, non-filers and problem tax audits. Please e-mail questions for this column or mail them to TaxTips, Self-Employed America, 2121 Precinct Line Rd., Hurst, Texas, 76054. Sorry, no personal replies.
Tax Dates To RememberMark these tax dates on your calendar. Or better yet, get a FREE small-business tax calendar from the NASE. Call 1-800-232-NASE, and never miss another deadline.
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