InTouch with Southern Kentucky March 2020 | Page 35

to have some voluntary federal
withholding out of their social secu-
rity to keep from owing a lot.”
When it comes to full self-employ-
ment, or even a side business, in-
come is subject not only to income
tax but also self-employment tax
— social security and medicare tax
— unless you have started a corpo-
ration. For employees getting a W2,
half of social security and medicare
comes out of the employee’s pay-
check while the other half is paid by
the employer.
“When you are a self-employed
sole proprietor, or even an active
partner in a partnership, you have
to pay both halves of the social
security and medicare…,” Harris
explained. “Also, if that business
is in a county and/or city with an
occupational tax, returns will have
to filed with those agencies as well.
Again, county/city taxes are with-
held from employees’ W2’s, but
self-employeds have to pay with the
return(s). BUT, you only pay tax on
the profit - keep good records of all
expenses so you get your profit, and
therefore your tax, as low as possi-
ble. And even if you form a corpora-
tion, if you personally work for the
corporation, you are expected to
pay yourself a salary in line with the
work you do and take out taxes.”
Knowing what forms you need is
half the battle:
• Be sure you have all your W2’s
before filing your return. Even if you
only worked at a particular location
for a week or so, a W2 from that
business matters.
• Include a Form 1099-MISC for
any work you may have done as
a subcontractor as well as any
expenses you may have incurred in
making that money. Your tax pre-
parer can help you determine which
expenses are deductible and which
aren’t. If you prepare your own re-
turn, remember that the 1099-MISC
is NOT a W2 and does not go on the
line for wages.
• If you have taken out retirement,
M arch 2020
you should get a Form 1099-R. Do
not attempt to file your return
without getting your 1099-R showing
your 401(k) distribution because
it can make a big difference. Re-
member, you do NOT have to take
out your 401(k) in the form of cash
when you leave a job. You can roll it
over into another retirement plan,
such as an IRA. Depending on your
age, you could save the 10% penalty
for early withdrawal as well as defer
the income tax on that distribution.
• Don’t attempt to file your return
without a 1099-C if you’ve had any
kind of debt cancellation such as
credit card debt, balances owed on
certain consumer loans, etc. You
may consider it a gift but the IRS
considers it taxable income.
• Also include 1099-INT’s for inter-
est income, 1099-DIV’s for dividend
income, and 1099-B’s for the sale of
stocks, bonds, mutual funds, etc.
outside of a retirement plan. Your
bank or brokerage company should
send these to you.
• Many people have a little
self-employed business. Unless you
have formed a corporation, you will
file taxes as a Sole Proprietor. Even
if you have formed an LLC, if you
are the only LLC Member and have
not opted to pay taxes as a Corpo-
ration, you will file taxes as a Sole
Proprietor. Report all your income
earned from that business and write
off against it all the expenses you
incurred to make that money. An
IRS Schedule C will show you the
categories into which to divide the
expenses. Again, your preparer can
help you know which expenses are
deductible. Keep receipts to prove
all expenses!
“If you do your own taxes, there
are several good programs that can
walk you through it,” Harris said.
“But follow the instructions careful-
ly or you may make a mistake” that
requires filing an amendment or
paying a penalty.
.
Cumberland
Lake, Inc.
“Working together for
a better community.”
P.O. Box 430
150 Railroad Drive
Somerset, KY 42502
Offi ce: 606-679-6316
Fax: [phone]
I n T ouch with S outhern K entucky • 35