Self-employed individuals should be aware of an important 2010 tax law change before they complete their 2010 federal income tax return. This tax change may be beneficial because it allows health insurance deductions to reduce Self Employment Tax.

Here’s what you need to know about the tax law change affecting the self-employed when you file your 2010 federal income tax return in 2011.

Health Insurance Deduction Reduces Self Employment Tax In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their social security self-employment tax liability in addition to their income tax liability. As in the past, eligible taxpayers claim this deduction on Form 1040 Line 29. But in 2010, eligible taxpayers can also enter this amount on Schedule SE Line 3, thus reducing net earnings from self-employment subject to the 15.3 percent social security self-employment tax.

Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer’s dependent.

As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan. Details, including a worksheet, are in the instructions to Form 1040.

For further information about this change or if you need answers to tax questions, visit the IRS website.

source: irs.gov

Did you know the IRS offers tax help to small business owners through its Small Business and Self-Employed Tax Center? The tax center offers extensive resources and online tools to small businesses and the self-employed.

The IRS Small Business and Self-Employed Tax Center offers tax help resources:

• Small business forms and publications
• Employer Identification Number online application
• Employment tax information – federal income tax, Social Security and Medicare taxes, FUTA and self-employment tax
• Tax-related news that could affect your business
• Small business educational events
• IRS videos for small businesses
• A-Z Index for Business – find information fast using the A-Z listing

The site provides tax tips and important information available for all stages of owning a business. Whether you’re starting, operating, or closing a business, visit the site for federal income tax help

Other tax tips and resources available on the IRS small business website include a virtual small business tax workshop, video and audio presentations, a guide to IRS audits, and a tax calendar designed for small business taxpayers.

The IRS Video Portal:
Tax Questions? Learn about tax topics through video and audio presentations on the IRS Video Portal. The video portal contains archived versions of live panel discussions, archived webinars, video clips, and audio archives of national phone forums.

IRS Audits Video Series:
“Your Guide to an IRS Audit” takes the viewer through the steps of an audit from notification to closing. The video series is composed of scenarios that demonstrate the stages of each type of audit: correspondence, office and field. The scenarios address issues that are common to audits of small businesses.

Virtual Small Business Tax Workshop:
The IRS Virtual Small Business Tax Workshop is an interactive resource to help small business owners learn about their federal tax rights and responsibilities. The workshop contains nine stand-alone lessons that can be selected and viewed in any sequence. The workshop is available online 24 hours a day, seven days a week from any computer. It can also be ordered on CD.

Tax Calendar for Small Business Taxpayers:
The Tax Calendar for Small Businesses and Self-Employed – Publication 1518 – is available online or as a printable PDF file. This 12-month calendar is filled with information on general business taxes, IRS and Social Security Administration customer assistance, electronic filing and paying options, retirement plans, business publications and forms, and common tax filing dates. Each page highlights different tax issues and tips that may be relevant to small-business owners, with room on each month to add notes, state tax dates or business appointments. You can also download the tax events into your calendar or subscribe to the tax calendar events. The calendar provides the small business owner with a ready resource for meeting their tax obligations.

Small business owners and the self-employed should take advantage of the tax tips and tax help provided by the IRS small business website.

Source: irs.gov

Sole proprietors and independent contractors are in business for themselves and therefore considered self-employed. At income tax time, self-employed individuals would file IRS Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit From Business with their 1040 tax form.

Here are some tax tips for sole proprietors, contractors and other self-employed individuals for filing their income tax return this year.

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay Self-employment Tax. Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. If you are self-employed you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments, you may be penalized for underpayment at the end of the tax year.
4. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
5. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information see IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Self-employed individuals should take advantage of these great tax tips when filing their 2010 income tax return.

source: irs.gov