Finance Tax Time

One of the advantages of working for yourself is you can write off a lot of different expenses to lower your taxable earnings. One deduction that is very popular is business mileage. Any mileage you undertake for business purposes can be converted into a very healthy tax deduction.

The IRS changes the rate at which you can deduct business mileage each and every year. The change has almost always been fairly small. The last few years, however, have seen some sizeable increases. The gas shortages associated with Hurricane Katrina [damaged refineries] and subsequent high oil prices have both had a big impact. In fact, the rates have increased more in the last two years than they did in the previous eight years combined.

Starting January 1, 2007, the rate for calculating your business mileage deduction goes up to a healthy 48.5 cents. To figure your deduction, you simply multiple this figure by the total business miles you drive in 2007. For example, if you drive 2,000 miles on business in 2007, your deduction would be 2,000 multiplied by 48.5 cents for a total write off of $970. Might it be time to start visiting your clients more often?!

It is important to understand that this deduction is for the 2007 tax year. When you site down to prepare your taxes on April 14, 2007 [lol], you will not use this figure. Instead, you will have to wait until April 14, 2008 when you prepare your taxes for the 2007 year. By the way, the mileage rate for 2006 is 44.5 cents per mile.

As you know by now, the key to limiting the pain of your tax bill is to maximize your deduction. With the business mileage deduction, you can get a very health write off. Just make sure to document your miles in case you get audited.

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As your business grows, you are going to need help. This help comes in the form of employees and independent contractors. What you can write-off is dependent upon how your helper is classified - as an employee or independent contractor.

Independent Contractor

Whenever possible, you want to use independent contractors to assist you. Payments to independent contractors are completely deductible. You simply claim the deduction on your return. If you pay them more than $600 during the tax year, you also must issue a 1099-MISC in January of the following year. Importantly, you do not have to pay employment taxes or make withholding on the compensation.

Unfortunately, the IRS doesn’t allow you to randomly classify a worker as an independent contractor. The key to the determination is whether you “control” the actions of the worker. Generally, you must be able to show the IRS that the worker is an independent contractor because they have the ability to control the details and means by which the work is accomplished. To this end, it is helpful to show the worker sets their own ours, has a work place and risks not getting paid if the work is below standard.

Employee

If your worker is classified as an employee, the tax burden increases. Under federal law, you are responsible for paying employment taxes related to the worker, even if there is only one.

Initially, you must withhold FICA, Social Security and income taxes from employee paychecks. As an employer, you must also contribute FUTA payments on your own, to wit, they are not deducted from the employees pay.

FICA stands for the Federal Insurance Contribution Act. This Act created a system to collect and provide benefits for workers who retire, are injured or become disabled. FICA is better known as Medicare.

FUTA stands for the Federal Unemployment Tax Act. This Act created a system to provide unemployed workers with temporary benefits until they obtain a new job. The system works in tandem with state unemployment acts. Most consider it a disaster, but you still have to pay.

In Closing

As you can see, it is cheaper to use independent contractors versus employees. The tax burden is significantly less, but make sure the IRS doesn’t reclassify them as employees.

Richard Chapo is with http://www.businesstaxrecovery.com - recovering overpaid taxes for small businesses. Visit our article page - http://www.businesstaxrecovery.com/articles - to read more tax articles.

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