1. It is possible for this taxpayer to exclude up to $92,900 of earned income and up to $13,006 for housing in the year 2011.
2. Americans may live in a variety of places, some more expensive than others. Those in a hi-cost living area may be able to exclude even more housing expense.
3. It is possible for both working husbands and working wives to take advantage of these exclusions.
4. Generally, an Ex-Pat must meet a substantial residence test which involves 330 days abroad in any year.
5. If the taxpayer is self-employed he/she must file if net earnings from self-employment are $400 or more.
6. Tax treaties generally rule the taxability from a certain country.
7. If, at the end of the tax year, the taxpayer is married and one is a U.S. Citizen or a resident alien and the other is a nonresident alien, it is possible to treat the nonresident as a U.S. Citizen.

“Pat Smith, a U.S. citizen, is married to Norman, a nonresident alien, pat and Norman make the choice to treat Normas as a resident alien by attaching a statement to their joint return.. Pat and Norman must report their worldwide income for the year they make the choice and for all later years unless the choice is ended ot suspended. Although Pat and Norman must file a joint return for the year they make the choice, they can file either joint or separate returns for later years.” (IRS Publication 54, 2010 edition p.6)

When I was employed in an office I received a W-2 at the end of each tax year. The 1099 will also arrive at the end of the year. The difference is that you are not an employee of the sender.

W-2

The Form W-2 is used by employers to report wages, tips and other compensation paid to an employee. The form also reports the employee’s income tax and Social Security taxes withheld and any advanced earned income credit payments. The Form W-2 is provided by the employer to the employee and the Social Security Administration.

1099

A Form 1099 is used to report payments made in the course of a trade or business to another person or business who is not an employee. The form is required among other things, when payments of $10 or more in gross royalties or $600 or more in rents or services are paid. The form is provided by the payor to the IRS and the person or business that received the payment.

A Situation Requiring a 1099

I am starting a business with an Associate who lives thousands of miles away from me. In fact, I’m traveling to work with her. Since I need to earn a salary while starting our joint venture, my Associate and I decided me to look into the tax ramifications involved in awarding me a daily allowance. Who better to turn to than my own mother?

Mom‘s advice:

I’ve never filed an income tax return as my own business before. Once I adopt a tax year, I fill in a return using that year. Apparently it isn’t good enough simply to fill out an application for an extension of time to file an income tax return, apply for an EIN or pay an estimated amount.

What constitutes a tax year?

You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. A tax year is usually 12 consecutive months. There are 2 kinds of tax years:

Calendar tax year (this is the one me and most people use)

(begins January 1 and ends December 31). If you start your business using the calendar year model, you’ve got finish the year using this model even if you switch from Sole Proprietor to a partnership or a shareholder in and S corporation. To override this decision, you need direct IRS approval. Additionally, you must follow the calendar tax year model if you:

	keep no books
	have no annual accounting period
	your present tax year doesn’t qualify as a fiscal year
	There is a publication called 538 that I got this information from. It discusses these facts in detail. Download it here.

Fiscal tax year

12 consecutive months ending on the last day of any month except December.

Keep some records according to one of the accounting methods described below. It boils down to: confessing your true income, honestly logging your expenses and when you can only deduct a portion, knowing what portion to take

Accounting Method

An accounting method is a set of rules used to determine when and how income and expenses are reported. You should be careful, switching accounting methods after you’ve set one up requires IRS permission. You have to keep the same accounting method to figure out your taxable income and your books.

There are 2 basic accounting methods:

Cash Method

Report income in the tax year you receive the income. Deduct or capitalize expenses in the tax year you pay them.

Accrual Method

Use this method if you are going to have an inventory.

Q. Mom, I will probably have an online inventory of ebooks. It won’t take physical space except for a few megabytes the on the master. Is this also inventory?

A. TBD

Report income in the tax year you earn it even though you may receive payment in a later year. You deduct or capitalize expenses in the tax year you incur them whether or not you pay them that year.

What if I have 2 Businesses?

When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows income. You have to keep a complete and separate set of books and records for each business.

Supporting Documents

Gross receipts, purchases, expenses and assets all need to be backed up with paperwork. The IRS suggests (but doesn’t insist) that you organize these documents by year and type of income or expense.

What’s a Gross Receipt Document?

This is another way of saying the income you receive from your business. You should keep documents that show the amounts and sources of your gross receipts:

	Cash register tapes
	Bank deposit slips
	Receipt books
	Invoices
	Credit card charge slips
	Forms 1099 -MISC

What’s a Purchase Document?
(I won’t have to use this in my business right now)

Purchases are the items that you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

	Canceled checks
	Cash register tape receipts
	Credit card sales slips
	Invoices

What’s an Expense Document?

Other then purchases (above) expenses are all the costs to carry out your business. Make sure your supporting documents show the amount paid and that the amount was for a business expense:

	Canceled checks
	Cash register tapes
	Account statements
	Credit card sales slips
	Invoices
	Petty cash slips for small cash payments

How small is small?

Small is small enough so that you wouldn’t normally write a check for it. Each time you make a payment from this fund, fill out a petty cash “cash slip” and attach it to your receipt as proof of payment.

There are additional forms to read if you need to know more about expenses like travel, transportation, entertainment and gifts. The IRS suggests you read Publication463.

What’s an Asset Document?

Assets are the property, such as machinery and furniture you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets. Your records should show the following information:

	When and how you acquired the asset
	The purchase price
	Cost of any improvements
	Section 179 deduction taken
	Deductions taken for depreciation
	Deductions taken for casualty losses such as losses resulting from fires or storms
	How you used an asset
	When and how you disposed of the asset
	Selling price
	Expenses of sales

The following documents may also show this information:

	Purchase and sales invoices
	Real estate closing statements
	Canceled checks

Business Plan

You do not NEED a business plan for the IRS or to run a business. They’re helpful, useful, but really most useful if the owner does it herself. You do need books (Ie., accounting books). An income journal of all income received by the business and a Disbursement (expenses) journal. They are EASY.

It’s an extremely flexible and manageable form of doing business. 85% of American businesses file on a schedule C. If there is over $400 of income, one MUST file a Schedule C even if the net result is a loss.

The problem with a Sole Proprietorship is that you and your business are one. There is no legal separation. Some people solve this with business insurance; others think they aren’t in an activity where they might get sued; still others use a Limited Liability Company (LLC) to provide separation. But it’s fragile. An LLC owned by 1 person is filed on a Schedule C and it’s not much of a separation.

You are never your businesses’ employee

You can have employees but you are not one of them. The Sole Proprietorship is filed on a Schedule C. Income (at the top) Deductions (underneath) Office in home expenses & depreciation off that number, if anything’s left. The net profit goes two places: to the front of the 1040, and to the Schedule SE to calculate Social Security taxes, which go to the back of the 1040. Business income: all cash-in from business activity should be listed on some sort of Monthly summary of cash receipts.

Sample Monthly Summary of Cash Receipts

A journal is a book where you record each business transaction shown on your supporting documents. You may have to keep separate journals for transactions that occur frequently.

A ledger is a book that contains the totals from all of your journals. It is organized into different accounts. Whether you keep journals and ledgers and how you keep them depends on what kind of business you are in.

Small Business Ledgers

	Business checkbook (Keep a second checkbook for business and make sure to write the year on the top of each page)
	Daily summary of cash receipts
	Monthly summary of cash receipts
	Check disbursement journal
	Depreciation worksheet

Income Tax Income | Self-employment | Employment | Excise. Of these four, only the first two are currently of concern to me as a website designer…

No getting around it, every business with sales of $400.00 or more fills out income tax forms.

Who is everyone?

	Sole Proprietor (Schedule C);
	Partnership (Form 1065);
	C-Corporation(1120);
	S-Corporation(1120S);
	Limited Liability Company (filing depends on choices).

At the end of the year, W2s must be sent to employees and 1099s to any subcontractor to whom you pay more than $599.00.

What forms for Income Tax?

	Sole Proprietor- 1040 + Schedule C (or C)
	Partner in a Partnership (Individuals) - 1040 and Schedule E (various other Schedules may be needed) and a 1065 (annual return of income)
	Corporation- 1120 (or 1120-A) or S Corporation - 1120S
	S Corporation Shareholder - 1040 and Schedule E

What’s this Estimated Tax Stuff?

Generally, we pay taxes on income, including self-employment tax by making regular payments of estimated tax during the year. If you as an individual are going to owe more than $1000 or as a corporation $500, you gotta do these estimates.

If the bulk of your income has come from wages, you were actually paying your taxes on a pay-as-you-go plan.  When people get income that has not been taxed, they are required to pay estimates to both Federal and State governments on 1/15, 4/15. 6/15, and 9/15 of each year.

Here is what to fill out and make the correct deposits for before you send in your return:

	Sole Proprietor- 1040-ES (Estimated Tax for Individuals)
	Partner in a Partnership (Individuals) - 1040-ES (Estimated Tax for Individuals)
	Corporation- 1120-W
	S Corporation Shareholder - 1040-ES (Estimated Tax for Individuals)

Self-employment tax (SE tax)

Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies:

Employment taxes

If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. An independent contractor is someone who is self-employed. Generally, you do not have to withhold taxes for an independent contractor.  A true independent contractor is like a plumber who works by contract in their own time, with their own tools, and in a method of their own choosing.  A plumber trains himself.  (An employee is trained by the employer). A plumber may hire someone else to do the work at your house.  A plumber is liable for his work and the liability follows after he leaves.  When an employee is fired, the liability for the work remains (usually) with the employer.

If you aren’t sure whether or not you have employees, read the section called IC vs. Employeeon this site.  I’m going to be using ICs in my business so I will only briefly mention:

Employment taxes include the following:

Mom says:

The IRS send employers a booklet of coupons: twelve 8109s.  By the fifteenth of each month, the employer is to deposit the employee’s withheld federal Income Tax and the Employees and employer’s halves of FICA (Social Security and Medicare).

There are much tighter rules for larger employers.

The IRS is trying very hard to get every employer to now make these deposits on-line.

What do people I hire have to fill out?

Have them fill out an I-9 (pronounced “eye-nine”) and a W-4 Form. Each new hire must also now (within 20 days) fill out a “New hire” form. If your employees qualify for and want to receive advanced earned income credit payments, they need to give you a completed W-5.

What’s on the:

I-9 - Verification that each new employee is legally eligible to work in the US of A.

W-4 - This makes sure that your employees and you are in synchronicity with the IRS about how many hours they actually worked.

W-5 - This is for people who get money back for having kids.

Excise taxes

I’m not going to need to look at Excise Taxes right now for my business. But for your convenience, this section describes the excise taxes you may have to pay (read Form 510) and the forms you have to file if you do any of the following:

I don’t think I need to fill out Form 720 because I have an internet business and I don’t think it is subject to:

But you may have to so check it out.

Estimating a projected rate of growth is part of a businesslike approach that can be helpful if you’re trying to prove you have a real business instead of a hobby. To start a business, you have to know how much you can expect to make and how much you can expect to spend. Easier said then done. This page helps you get started.

Something like .05 (1/2 percent) per month is a steep growth rate for any new business.

Ask yourself how much more you need to make each month to make your business work. This estimate helps you know how much to put aside for taxes, how much you’ll probably need for expenses and how to set reasonable goals for yourself.

Projection Formula (how much you can expect to earn)

Take your average monthly income, multiply it by the estimated growth rate.  For example: .05 (half a percent growth per month). This is actually sort of a high estimate. The formula is straight forward:

Example:

Lets say that in January, I think my business will make $100.00 but in February, I’d like to be making $100.00 + .05% or $105. I think this rate of growth is consistent throughout the year. Here is how my estimated year will look:

The formula in Excel for cell B3 is: =SUM(B2*1.05).

How much you can expect to spend each month

Once you’ve made your projection, use the same formula to figure your your expenses if you think they will grow at the same constant rate. You need to figure out how much it costs you to open your doors each morning.

For your capital purchases, use the depreciation instead of the actual cost of the item. (for example, a $2000 laptop = $740 depreciation the 1st year.

Divide that by 365 and it comes out $2.03 per day or $60.90 per month). If you deducted the entire $2000 in one day it “skews” your calculations.

Amass your costs over a month. Count everything (including mileage needed to go get supplies etc.) then divide by 30.

That’s what you have to earn every single day to “make expenses”, or in other words, to break even. Deduct those expenses from a month’s cash-in from operations. It’s THAT resultant number you want to project growth on.

Evaluate your progress in X months (3/6/9/12) to see if you have been successful.

More suggestions for getting started

1. Create an evaluation sheet to refer to in order to determine if what you are trying to achieve is working.
2. If you are working with a partner, put an evaluation time frame on your relationship at which time you can decide whether what you are trying to achieve is working.
3. Put  your objectives on paper.
4. Describe key personnel and their duties and describe the way the business will be run (advertising and other ways of getting customers in the door).
5. Give justification for your businesses location, appearance and quality.

Employee

An employee is someone whose work you control.  Paid by the hour, day, week or month. Working at your place with your tools. Working when you say so (9-5 PM, 8-4P M, 9-12 AM, 4 days a week…). Working the way you want that person to work.

Contractor

I will contract with people for brief periods of time to do a specific thing. They are like Plumbers. They work where and when they want and with their own tools. They train themselves. Your job is to pay what the contract states. You must keep track of what you pay these people. Once over $599, you must send them (and the IRS) a 1099. You do not need to do this if they are incorporated.

If you live in California, there are some documents you need to give your independent contractors to sign. They must state that:

	the workers are not illegal immigrants
	they are covered by your state’s Bureau of Workers Compensation.

You will have to have a copy of their soc. security numbers.

An EIN, also known as a Federal Tax Identification Number, is a nine-digit number that the IRS assigns to business entities. The IRS uses this number to identify taxpayers that are required to file various business tax returns. EINs are used by employers, sole proprietors, corporations, partnerships, non-profit organizations, trusts and estates, government agencies, certain individuals and other business entities.

Don’t panic. Go straight to this URL:http://www.irs.gov/businesses/small/article/0,,id=97872,00.html and see if you click yes on anything. If you do, you need one and it takes you straight to the application. Nice planning HTML Public Interface team/Useability. Hope this compliment makes its way back to you someday.

Well, someday I may have employees, I don’t yet. But the thing that makes me click yes to the survey is that I am involved with non-profit agencies. For example, I created this site volunarily:http://www.santacruzvsashcroft.com and if my friends at WAMM can get additional compensation for the work I donated, that would be a great thing. So I’m clicking “yes” and getting an EIN.

Alas, for me continuing in this process means taking my fingers off the keyboard and picking up the telephone because foreign addresses can not be accepted online. I’ll have to figure my way around that one since I live in Israel.

Here is the quote from their site about this issue:

Entities that May Not Apply Online: The online application process is not yet available for the following types of entities: Foreign Addresses (including Puerto Rico), Limited Liability Company (LLC) without entity types, REMICs, State and Local Governments, Federal Government/Military, Indian Tribal Government/Enterprise.  Please call the toll-free Business and Specialty Tax Line at 1-800-829-4933 should you need assistance applying for an EIN.  Foreign Addresses (addresses outside the continental USA, Alaska and Hawaii) call 215-516-6999.

If you are in my position, or if you prefer not to do online registration, here is the form:

http://www.irs.gov/pub/irs-pdf/fss4.pdf ]]> http://ataxpayer.com/blog/2011/12/ein-numbers/feed/ 0