Reductions for Self-Employment Tax?

Question

I've been filling out the tax forms, and I worked as an independent contractor last year AND had a different job using a W2. I've figured out the taxes for the W2 job, and I think I've completed the taxes for the independent contractor job (using 1099-MISC and Schedule C). I'm just wondering it there are any deductions that can be applied to the self-employment tax. I've already made my deductions on business related expenses (car expenses, supplies, unpaid debt owed to me), but I was wondering if there's anything else. I am eligible for the Lifetime Learning Credit, but from what I understand, that's only deductible for the W-2 job.

Is there a way to claim dependents or exemptions from self-employment tax? I have two exemptions. If not, why is it that self-employment tax doesn't use exemptions?

I know it's a lot of questions...just trying to figure things out. Thanks!

The instructions provided by the IRS says to deduct any unpaid debts owed to you. Once they are paid, you add it to your income in the year they are paid IF paid.

Answer 1

You're right, that is a lot of questions. Sit down with a competent accountant and you'll learn the answers to most of them.

I'd like to address the last item you added--unpaid debts. If you are an individual, you're a cash basis taxpayer. Thus, any amounts that you bill to customers are not included in your income until they pay you. While there may be an unpaid debt owing to you from one of these customers, you cannot deduct that debt because you don't have what is called "basis" in it. Contrast your situation with an accrual basis taxpayer (generally no individuals use this method), who takes accounts receivable into income when they are invoiced. The act of recognizing the income gives him basis in the receivable. Then if it goes unpaid, he can deduct the basis in the unpaid debt. These are business bad debts.

You might have a nonbusiness bad debt for money you loaned to another person. If that debt goes unpaid, and you have exhausted all avenues for collection, you could deduct it when it became worthless. Why the difference? Because you advanced money on which you had basis--you had already earned it and paid income tax on it, or it had been given to you as a gift, or you received it as an inheritance. In all of these cases, you acquired basis in the funds you advanced for the loan.

Answer 2

If you've listed all the expenses you can think of that were required for you to make the money you made as an independent contractor, you might have them all. That "unpaid debt owed to me" is probably not a legit deduction, by the way.

If you're eligible for the Lifetime Learning credit, take it, and also the exemptions - those can be taken to decrease the INCOME tax from both the W-2 and the 1099 income - the "tax" and "total tax" lines include both. Since the self-employment tax is for social security and medicare, the education credits don't decrease those, only your income tax.

If you had been working as an employee, social security would have been taken out of your pay, and those credits would not have decreased that or the matching amount that your employer would have paid - your self-employment income isn't being treated any differently in this regard.

Good luck.

Answer 3

The self-employment tax is calculated in your self-employment earnings (final analysis of time table C). it is not laid low with itemized deductions. in case you have been a salaried worker, then itemized deductions may well be subtracted out of your adjusted gross earnings formerly your taxes have been calculated. yet because your internet earnings from self-employment is likewise extra in formerly the itemized deductions are subtracted, if the earnings stayed relating to an identical, it is not suitable. the reason the deductible loan interest and genuine belongings taxes will possibly not make assorted distinction on your taxes is that in case you do not itemize, you get a widespread deduction as a replace, so your purely earnings from itemizing comes from having itemized deductions extra suitable than the widespread - and the earnings is a % of that quantity, even if your tax bracket is.