Understanding Taxes: What Every Self-Employed Business Owner Should Know
Federal income taxes can be daunting at best and can border on infuriating. This is true for all Americans but especially true for self-employed business owners. Self-employment tax, hidden tax deductions, and quarterly estimated tax payments can add new headaches and regardless of complexities, taxes and tax compliance are an unavoidable part of doing business.
The National Association for the Self-employed (NASE) can help you manage your tax obligations with education, access to resources, and even tax professionals who can help with your questions one-on-one. Whether you are a freelancer, part of the gig economy, a solopreneur, or the owner of a micro-business, the following paragraphs will help you conquer your new tax world.
Self-employment Tax
In addition to regular federal income tax, the small business owner must also pay Self-employment Tax on the net earnings from their business. Self-employment tax is calculated as 15.3% of net earnings from self-employment (subject to limits) and is reported on IRS Schedule SE, Self-Employment Tax. An employee working for a company and receiving wages must pay 7.65% in Social Security Taxes, consisting of FICA tax and Medicare tax. The employer must also pay a separate 7.65% of employee’s wages for a total of 15.3%. Since the self-employed business owner is both the worker AND the employer, the Self-Employment Tax represents both halves of the applicable Social Security Tax, also 15.3%.
IRS Instructions for Schedule SE, Self-Employment Tax
The good news is that there is no separate income tax return for the sole proprietor, instead a few more forms are attached to their personal income tax return. The key point is that setting aside money for Uncle Sam as you plan for your business activity should include not only regular federal income tax but also Self-Employment Tax. Keep in mind that both federal income tax and the Self-Employment Tax can be reduced by making sure you account for all available expenses that you incur in operating your new small business, including those that may be hidden from your business check book.
Hidden Tax Deductions for the Self-Employed
Most valid business deductions for the self-employed business owner are found right in the business checkbook or on the business credit card statement. You pay for something that is ordinary and necessary and has a business purpose and therefore, it is deductible. It is certainly important to keep track of your bank account and your credit card bills so that you have a record of all of those deductible items. But there are some ‘hidden’ deductions that don’t show up in either of those places.
Business Use of Your Vehicle
If you use your personal vehicle in connection with your small business you have a tax deduction related to the cost of maintaining that vehicle. This deduction does not show up in your business checkbook so, it is easy to miss. The IRS allows two methods for determining the allowable deduction, The Standard Mileage Rate method and The Actual Expense method. Most small business owners use the Standard Mileage Rate method simply because it is easier. This method requires that you keep a mileage log detailing all business miles you drive. The IRS provides a standard rate per mile, 67 cents per mile for 2024 and 70 cents per mile for 2025. Multiplying your total business miles by the standard amount per mile determines the deduction for your tax return. That’s it!
The Actual Expense Method is a bit more cumbersome but not overwhelming. This method requires that you keep track of all expenses you incur to maintain the vehicle. That includes gasoline, oil changes, maintenance, repairs, insurance, etc. You still must maintain a mileage log, but now you much determine the ratio of business miles driven divided by total miles driven. This percentage is then multiplied by the total costs to arrive at your allowable deduction. You can choose whichever method works best for you, just make sure to choose one of them and don’t forget to include this deduction on your tax return.
IRS Publication 463, Travel, Gift, and Car Expenses
Business Use of Your Home
If you have a space in your home that you use regularly and exclusively for business then you have a business deduction related to that use. This also does not show up in your business checkbook and therefore can be easily missed. Congress recognizes that the small business owner most likely works, as least part of the time, from their home and recognizes that those costs should be deductible. There are also two ways to determine this deduction. The “Long Form” requires you to keep track of all expenses you incur to maintain your home. Those include mortgage interest, property taxes, utilities, maintenance, rent, etc. etc. The total square footage of that space used for business is then divided by the total square footage of your home. The product of those two numbers provides the allowable deduction, subject to limitation.
The IRS also provides a short-cut by allowing a simple $5 per square foot of office space up to a maximum of $1,500. The standard amount is a great way to reduce some record keeping but maintain a significant deduction for your tax return. Regardless of which method you choose, make sure you don’t forget the Home Office Deduction.
IRS Publication 587, Business Use of Your Home
Retirement Plan Contributions
The last thing you should consider before you hit ‘send’ on your income tax return is the possible tax deduction available for contributing to your own future. Congress recognizes the need for all Americans to save for their own future so they are willing to put their money where their mouth is. If you contribute money to a qualified retirement plan, the IRS will give you a tax deduction for saving for your own future. Its like the IRS is subsidizing your own savings plan. There are many options available including traditional IRA accounts, SIMPLE plans, 401(k) plans, and Simplified Employee Pension plans or SEPs. All of these options are beneficial but perhaps the easiest and most flexible for the self-employed business owner is the SEP.
The small business owner can contribute up to 20% of the net income from their business to an SEP, make that contribution as late as the extended due date of their tax return, and still take a full deduction on last year’s tax return. This not only can save significant amounts in current taxes but also provide for your own future. Some years it may seem difficult from a cash flow standpoint, but always try and maximize the contribution to your future. When you retire, you will be glad you did.
Quarterly Estimated Tax Payments
The IRS tax concept is based on a “pay-as-you” system so that they expect all taxpayers to pay their federal income tax evenly throughout the year as they are earning the related income. Individuals who work for someone else accomplish this through withholding on their payroll checks. The employer withholds the tax and sends it to the IRS on behalf of the worker. For the self-employed business owner, no such withholding process exists. Therefore, those small business owners must make quarterly estimated tax payments in order to meet the pay-as-you go system. No one from the IRS will call you to remind you to make your quarterly estimated tax payments, however, if you don’t make the required payment amounts, you will be subject to penalties and interest that you wouldn’t otherwise have to pay.
There is no great secret on calculating these payments and there are no tax returns or forms necessary to make the payments. The IRS just wants you to make a good guess as to how much you will owe and then send that amount in…a little each quarter. Take a good guess at what your income will be for the whole year. Prepare a ‘what-if’ tax return based on those educated guesses. From the amount of tax on that pretend tax return you can determine a good guess on how much you should send in each quarter. Remember, these are only supposed to be ESTIMATED tax payments. So don’t spend too much time, but just pick a good number and send it in. When April 15th rolls around, you will be very happy that you made the estimated tax payments.
You’re Not Alone
Navigating the Internal Revenue Code can be difficult for everyone, but particularly for the small business owner. If you can remember only one thing from the detail provided in this discussion, it should be this…No matter how much you may feel isolated, you are not alone. There are significant resources available for you right at the click of a mouse. The IRS has a great website at www.IRS.gov as does the Small Business Administration at
www.SBA.gov. The NASE has a slate of experts available to help you with any question you might have through its member benefit, Ask the Experts
at www.NASE.org.
2024 Growth Grant Winners
We would like to thank all of the NASE members who applied last year, we love to learn about your businesses and how you are making a positive impact in the communities in which you live. We would also like to congratulate those chosen to receive the Growth Grant award in 2024 as these 28 applications stood out amongst the sea of very well written and composed applications. From all of us here at NASE, thank you, well done and well deserved!
Aurora LeBlanc
Q1 2024
Le Decorant | Williamsport, Pennsylvania
Aurora LeBlanc, a NASE Member from Williamsport, Pennsylvania was awarded a NASE Growth Grant in the first quarter of 2024. Le Decorant creates unique cakes, cupcakes, cookies, and other pastries for any occasion.
Amy Gurka
Q1 2024
Wellness West, LLC | Waukesha, Wisconsin
Amy Gurka, a NASE Member from Waukesha, Wisconsin was awarded a NASE Growth Grant in the first quarter of 2024. Wellness West is a mental health clinic where clients feel comfortable engaging, and clinicians are able to perform at their best.
Sara Pastore
Q1 2024
Tea Bath Products LLC | Las Vegas, Nevada
Sara Pastore, a NASE Member from Las Vegas, Nevada was awarded a NASE Growth Grant in the first quarter of 2024. Tea Bath Products creates luxurious bath products mixing sea salts, cleansing herbs, botanicals and light essential oils.
Joshua Miller
Q1 2024
Remarkable Foods LLC | Albany, New York
Joshua Miller, a NASE Member from Albany, New York was awarded a NASE Growth Grant in the first quarter of 2024. Remarkable Foods aims to elevate academic foodservice by prioritizing high-quality programs that cater to the student’s desires while improving the experiences for the dedicated individuals “behind the scenes” who tirelessly provide exceptional food and service.
Melissa Simpson
Q1 2024
Happy Tails Dog Training LLC | Grand Rapids, Michigan
Melissa Simpson, a NASE Member from Grand Rapids, Michigan was awarded a NASE Growth Grant in the first quarter of 2024. Happy Tails Dog Training trains dogs using force-free methods and solutions that are effective, useful, and provide dogs with the skills necessary to be successful members of households.
Jeremiah Joseph
Q1 2024
Opilio LLC | Chula Vista, California
Jeremiah Joseph, a NASE Member from Chula Vista, California was awarded a NASE Growth Grant in the first quarter of 2024. Opilio was founded in 2023, with a vision to help companies harness the value of structural biology efficiently and economically.
Corinne Pusawong
Q1 2024
Pirro’s Pizzeria | San Francisco, California
Corinne Pusawong, a NASE Member from San Francisco, California was awarded a NASE Growth Grant in the first quarter of 2024. Pirro’s specializes in Sicilian pizza brought over from Sicily by the original restaurant founder, Mr. Fred E. Pirro, in 1954.
William Gash
Q2 2024
Mystic River Chocolate | Mystic, Connecticut
William Gash, a NASE Member from Mystic, Connecticut was awarded a NASE Growth Grant in the second quarter of 2024. Mystic River Chocolate creates fresh and high quality chocolate and beer products.
Shahzaman Khan
Q2 2024
Aladdin’s Hut | Tampa, Florida
Shahzaman Khan, a NASE Member from Tampa, Florida was awarded a NASE Growth Grant in the second quarter of 2024. Aladdin’s Hut serves Halal and Mediterranean style food where the menu is a treasure trove full of flavors.
Denasso Allen
Q2 2024
All the Way Clean Car Wash | Bossier City, Louisiana
Denasso Allen, a NASE Member from Bossier City, Louisiana was awarded a NASE Growth Grant in the second quarter of 2024. All The Way Clean Car Wash provides top-quality washing and detail services for vehicle owners in Shreveport and the surrounding area.
Darnesheia Coleman
Q2 2024
Exactly Turner Services | Humble, Texas
Darnesheia Coleman, a NASE Member from Humble, Texas was awarded a NASE Growth Grant in the second quarter of 2024. Exactly Turner Services is a Tax and Small Business Accounting Firm that serves a variety of individual clients and small business owners nationwide and internationally.
Tabbatha Cornelius
Q2 2024
On-Farm Marketing | Davenport, Iowa
Tabbatha Cornelius, a NASE Member from Davenport, Iowa was awarded a NASE Growth Grant in the second quarter of 2024. On-Farm Marketing specializes in written marketing plans for grain and livestock coupled with hedge strategies for overall risk management.
Steve Woodburn
Q2 2024
Marvelous Moosey | Lilburn, Georgia
Steve Woodburn, a NASE Member from Lilburn, Georgia was awarded a NASE Growth Grant in the second quarter of 2024. The passion of Marvelous Moosey is to develop a character and brand that brings joy to children and to those who remain young at heart. And to remind the world that being Unique is Marvelous.
Richard Parr
Q2 2024
American Resurfacing | Carson City, Nevada
Richard Parr, a NASE Member from Carson City, Nevada was awarded a NASE Growth Grant in the second quarter of 2024. American Resurfacing specializes in bathtub refinishing, countertop resurfacing and cabinet painting.
Emily Pecoraro
Q3 2024
Emily Enchanted, LLC | Albuquerque, New Mexico
Emily Pecoraro, a NASE Member from Albuquerque, New Mexico was awarded a NASE Growth Grant in the third quarter of 2024. Emily Enchanted is a popular food blog all about comfort food and cocktails whose mantra is “Food is celebratory. Food is comforting. Food brings people together.”
Ginette Rhodes
Q3 2024
Netty’s Juicery | High Ridge, Missouri
Ginette Rhodes, a NASE Member from High Ridge, Missouri was awarded a NASE Growth Grant in the third quarter of 2024. Netty’s Juicery focuses on offering nutritious, sustainably sourced juices to their community.
Mary Miles
Q3 2024
MG Accounting & Tax Services, LLC | Kennesaw, Georgia
Mary Miles, a NASE Member from Kennesaw, Georgia was awarded a NASE Growth Grant in the third quarter of 2024. MG Accounting & Tax Services provides professional and quality accounting and tax services with a unique understanding of the financial record keeping and tax challenges that small businesses face.
Ann Dickson
Q3 2024
The Arts Hub | San Rafael, California
Ann Dickson, a NASE Member from San Rafael, California was awarded a NASE Growth Grant in the third quarter of 2024. The Arts Hub provides a suite of services to small and mid-size art organizations, cities, municipal agencies, and businesses, bringing them together to harness the power of arts and culture for the betterment of the local community.
Dena Reardon
Q3 2024
Vault Athletics & Fitness | Virginia Beach, Virginia
Dena Reardon, a NASE Member from Virginia Beach, Virginia was awarded a NASE Growth Grant in the third quarter of 2024. Vault Athletics & Fitness is a fitness facility comprised of experts in their field collaborating for the sole purpose of building better athletes.
Stefano Iaboni
Q3 2024
Smile Solution LLC | Portland, Oregon
Stefano Iaboni, a NASE Member from Portland, Oregon was awarded a NASE Growth Grant in the third quarter of 2024. Smile Solution provides experiential training, team building workshops, group activities and innovation sessions.
Kimley Armour
Q3 2024
Digital Diva Defense LLC | Detroit, Michigan
Kimley Armour, a NASE Member from Detroit, Michigan was awarded a NASE Growth Grant in the third quarter of 2024. Digital Diva Defense is a leading cybersecurity consulting firm providing comprehensive solutions, market trend analysis, and competitive analysis services to empower our clients in navigating the digital world securely.
William Gash
Q4 2024
Mystic River Chocolate | Mystic, Connecticut
William Gash, a NASE Member from Mystic, Connecticut was awarded a NASE Growth Grant in the fourth quarter of 2024. Mystic River Chocolate creates fresh and high quality chocolate and beer products.
Leon Goudeau
Q4 2024
CORE Physical Therapy, PLLC | San Antonio, Texas
Leon Goudeau, a NASE Member from San Antonio, Texas was awarded a NASE Growth Grant in the fourth quarter of 2024. CORE Physical Therapy is an outpatient sports and orthopedic rehabilitation clinic which provides education, injury rehabilitation, injury prevention, functional movement screenings and sports performance training.
Gerardo Vargas
Q4 2024
Aquarium Source | El Paso, Texas
Gerardo Vargas, a NASE Member from El Paso, Texas was awarded a NASE Growth Grant in the fourth quarter of 2024. Aquarium Source is a resource where aquarists can learn and find reviews on the best products for their tanks.
Karen May
Q4 2024
Aphrodite Hair Design | Portland, Oregon
Karen May, a NASE Member from Portland, Oregon was awarded a NASE Growth Grant in the fourth quarter of 2024. Aphrodite Hair Design is a premier hair salon and wig retailer that caters to a diverse clientele of men, women, and children.
Enrique Carstens
Q4 2024
Modern Day Concrete | San Antonio, Texas
Enrique Carstens, a NASE Member from San Antonio, Texas was awarded a NASE Growth Grant in the fourth quarter of 2024. Modern Day Concrete provides superior quality services to the construction market, offering the best value on decorative and functional concrete flooring systems.
Randy Brumell
Q4 2024
Brumell’s Cycling | Torrington, Connecticut
Randy Brumell, a NASE Member from Torrington, Connecticut was awarded a NASE Growth Grant in the fourth quarter of 2024. Brumell’s Cycling aims to provide high quality bikes, repairs, and accessories to cycling enthusiasts of all levels while fostering a strong local cycling community.
Tab Pierce
Q4 2024
Caliber Security Partners | Tacoma, Washington
Tab Pierce, a NASE Member from Tacoma, Washington was awarded a NASE Growth Grant in the fourth quarter of 2024. Caliber Security Partners provides a variety of information security services to help organizations transition past their barriers to growth, protect their business and assets, and recover and remediate after a security data breach or loss.
The Boy Who Cried Shutdown: Are We Barreling Towards a Shutdown?
As Congress approaches the March 14 deadline for federal funding, the specter of a government shutdown looms large. Despite Republicans holding the presidency and both chambers of Congress, internal divisions and contentious negotiations will prove challenging as a Congress avoids a government shutdown.
The current fiscal impasse traces its roots to the passage of a short-term continuing resolution (CR) in December 2024, which extended government funding through March 14, 2025. This stopgap measure was intended to provide lawmakers with additional time to negotiate a comprehensive budget for the remainder of the fiscal year. However, as the deadline approaches, significant disagreements persist, primarily within the Republican Party.
Internal GOP Divisions
Despite controlling the legislative and executive branches, Republicans are grappling with internal factions that complicate the budgetary process. Moderate Republicans express concern over proposed cuts to social programs like Medicaid and the Supplemental Nutrition Assistance Program (SNAP), fearing voter backlash in the upcoming midterm elections. Conversely, conservative members argue that the proposed cuts are insufficient, advocating for more substantial reductions to address the national debt. This ideological rift has made it challenging for House Speaker Mike Johnson to unify his caucus around a cohesive budget plan.
The Trump-Musk Influence
Complicating matters further is the involvement of President Donald Trump and his advisor, Elon Musk, who leads the newly established Department of Government Efficiency (DOGE). The administration’s aggressive cost-cutting measures, including significant federal job cuts and program eliminations, have raised alarms among Democrats and some Republicans. Musk’s influence has been particularly polarizing, with critics accusing him of wielding undue power over federal operations. The administration’s actions have led to heightened tensions in budget negotiations, as lawmakers grapple with balancing fiscal responsibility and maintaining essential government services.
Democratic Opposition
Democrats, though in the minority, play a crucial role in the budgetary process, especially in the Senate, where a supermajority is required to pass spending bills. They have been vocal in their opposition to the proposed budget cuts and the administration’s unilateral actions. Democratic leaders demand assurances that the executive branch will adhere to congressional appropriations and not unilaterally rescind funding for programs they deem essential. This standoff has further complicated efforts to reach a bipartisan agreement to avert a shutdown.
Potential Impacts of a Shutdown
A government shutdown would have wide-ranging consequences, affecting various sectors and millions of Americans.
- Federal Employees: Approximately two million civilian federal workers could face furloughs or be required to work without pay. This scenario would lead to financial hardships for many families and disrupt public services.
- Basic Government Services: Essential services such as air traffic control and law enforcement would continue, but many others, including national parks and museums, could close. Processing of applications for passports and visas may be delayed, affecting travel plans and international business.
- Economic Impact: A prolonged shutdown could hinder economic growth, disrupt financial markets, and diminish consumer and business confidence. Sectors reliant on federal funding, such as defense and healthcare, could experience significant disruptions.
- Social Programs: Programs like Medicaid and SNAP could face delays in funding, impacting millions who rely on these services for healthcare and food assistance.
To avert a shutdown, Congress must pass either a new budget or another continuing resolution by March 14. However, relying on short-term funding measures is not a sustainable solution, as it hampers long-term planning and creates uncertainty across government agencies. A comprehensive budget agreement is essential to provide stability and ensure the uninterrupted delivery of public services.
Conclusion
The looming government shutdown highlights the complexities of federal budgeting and the intricate interplay of politics, policy, and governance. Despite holding the reins of power, the Republican Party’s internal divisions, coupled with Democratic opposition and the administration’s controversial actions, have brought the nation to the edge of a shutdown. The coming days will be critical as lawmakers navigate these challenges to fulfill their fundamental responsibility of funding the government and serving the American people.