If you receive a 1099 tax form in the mail for performing services, you are operating a business. You have just formed a sole proprietorship. This is the term Internal Revenue Service literature names a one person business.
There are several ways to handle your income. Some people report it on the other income line of their personal tax return. The income is usually subject to unemployment tax which is over ten percent of the income.
Since you are now a sole proprietor, you are permitted to deduct business expenses from the income. So you should consider filing the income on a Schedule C of your individual tax return. The schedule permits for expenses to be deducted.
There are as many expenses are there are colors in the rainbow. Generally expenses that were incurred in the production of income are deductible. For instance, if the income is for lawn maintenance, you may have expenses like paying your employees and for gas to operate the lawn mowing equipment. But a trip you and your family took to the beach for vacation would not be a valid business expense.
There are publications, forms and form instructions available from the Internal Revenue Service website. These documents provide guidance on business record keeping, deductions and many other new business owner related matters. Any new sole proprietorship should obtain a list and review some relevant publications to help with the operation of their business.
Although a sole proprietorship has unlimited liability for its business dealings, there are some options to help. Incorporation is the most widely known option. Incorporation separates your business assets form your personal assets and may provide some protection.
If your personal assets are of significant worth, you should consider taking them out of the name the business is in. The obvious concern is the trust issue with the person you transfer the assets to.
Another option involves making yourself unattractive to lawsuits. If your personal house is worth a couple of hundred thousand dollars free and clear, you are obviously a prime lawsuit target. Consider loaning our eighty or more percent of the home’s value to yourself or your business. Now you are not as appealing to the potential lawsuit shopper. This practice is referred to as equity stripping.
If you have substantial assets at risk, it is well worth the sole proprietor’s time and money to consult an expert. A Certified Public Accountant will be able to walk you through the tax implications of your newly formed business. A lawyer probably should be consulted about estate structure and planning. And do your homework. You would not take your foot injury to an internal medicine specialist. So you should not ask a criminal lawyer about estate planning. Most fields have specialties. Do your shopping before you visit the expert and you will reap better rewards. Wasted time is wasted money.