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The IRS recently released Publication 334, Tax Guide for Small Business, for use by individuals who file a Schedule C or C-EZ in preparing their 2010 returns and planning for the 2011 tax year. It highlights several administrative and tax law changes for 2010 and 2011, including several changes enacted as part of the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act).
Background. Publication 334 states that a taxpayer is self-employed if he carries on a trade or business as a sole proprietor (i.e., owner of unincorporated business) or independent contractor. A “trade or business” is defined as an activity carried on with the intent of making a profit, although the taxpayer need not actually make a profit in order to be in a trade or business. The publication further stated that a taxpayer's part-time business, conducted in addition to a full-time job, can be considered self-employment.
Many service providers who offer their services to the general public, including doctors and lawyers, are considered independent contractors. The distinction between an employee and an independent contractor often turns on the amount of control exercised by the payor. In general, an individual is an independent contractor if the payor has the right to control or direct only the result of the work and not how it will be done. The earnings of an independent contractor are subject to self-employment tax.
Statutory employees (who have box 13 checked in their W-2s) and individual owners of single-member limited liability companies (LLCs) also use Schedule C or C-EZ.
What's new for 2010. Publication 334 examines these new items for 2010:
- ... Self-employment tax wage base. For 2010, the maximum net self-employment earnings subject to the social security part of the self-employment tax remains at $106,800.
- ... Self-employed health insurance deduction. For 2010, self-employeds can deduct any self-employed health insurance deduction reported on Form 1040, line 29, from self-employment earnings.
- ... Increased Code Section 179 expense deduction dollar limits. For tax years beginning in 2010 (and 2011), the amount that may be expensed under Code Section 179 is $500,000.
- ... Standard mileage rate. For 2010, the standard mileage rate is 50¢ per mile.
- ... New general business credits. For 2010, there are 2 new general business credits: (1) the credit for small employer health insurance premiums, for eligible small employers' nonelective contributions to purchase health insurance for its employees (Form 8941); and (2) the new hire retention credit, up to $1,000 for retaining qualifying employees hired after February 3, 2010 and before January 1, 2011 (Form 5884-B).
What's new for 2011. Publication 334 highlights these new items for 2011:
- ... Self-employment tax wage base. For 2011, the maximum net self-employment earnings subject to the social security part of the self-employment tax remains at $106,800.
- ... Self-employment tax reduction. For 2011, self-employeds pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.
- ... Standard mileage rate. For 2011, the standard mileage rate is 51¢ per mile.
- ... Information reporting requirements. For 2011, subject to limited exceptions, a person receiving rental income from real estate is treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income must provide an information return to the service provider and IRS.
Extended due date for 2010 return. The due date for calendar year Form 1040 for 2010 is April 18, 2011. For fiscal year taxpayers, the due date is the 15th day of the 4th month after the end of the fiscal year. Any taxes owed are due by April 18, 2011, to avoid late-payment penalties and interest.
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