Self Employed Business Tax Question....?

Question

I started a side business this year (last three months of the year) that had income of $19,500 and expenses of $20,000 which gives me a small net loss for the year. Do I have to pay any federal taxes or social security or self employment taxes or any tax for that matter even though I have a net loss for the year? I am worried that I might need to make an estimated tax payment next week. please help....

Answer 1

If this is your only income you are not required to file a return. If however any of that money was or is going to be reported on a 1099 MISC by the person who paid you than you may wish to file to avoid the IRS sending you a request for information regarding the 1099 MISC which will initially state that you owe taxes on that amount without regard to your expenses.
If you had other income which would require you to file and you have no tax liability or very little it would be a good idea to file a Schedule C with this business but don't use all of the expenses and declare a gain of something less than $400. This will give you a year of profit to show that this is a legitimate business.

Answer 2

If you had a legitmate net loss for the year operating your business, then you won't have any tax liability. Make sure you can support the 20K expense. If some of this expense is depreciation, you may want to use a slower method to depreciate your fixed assets and show a small profit. The IRS doesn't like losses. You should estimate your 2007 net income and start paying your taxes quarterly.

I'm not pushing Turbotax but it would be a great help to ya.

Answer 3

You MUST file because your gross is over the limit.

Even though you had a "cash expenses" of $20K, you might not have had a tax loss that big. Consult a tax advisor because some things do not translate directly from your bank account.

Example: of your $20K in expenses, $5K was for inventory and $7K was for a computer.

The Computer must be DEPRECIATED, or deducted over a period of time. Only a portion of the amount is deducted annually, especially if you have losses.

Inventory is deducted AS YOU SELL the items. So if you sold half your items, you might deduct $2500 in 2006 even though you spent $5000.

You MAY have a profit for the taxman!!

WealthBuilder
Enrolled Agent / Tax Specialist

Answer 4

not as brutal but will slap you on the wrist.

You MUST file. The fact that you suffered a business loss this year will actually help you. your buisness taxes I strongly recommend paying once a quarter it does help at tax time.

However after three years of consective losses your "business" is considered a hobby and then the rules change again.

Answer 5

No, your scheme would not work. DEDUCTIONS reduce the amount of your income you pay tax on, not the tax itself. Self employed people pay tax quarterly using form 1040ES. If they don't, they owe when they pay and might have to pay penalties also.