The IRS marked National Small Business Week in 2017—the first week of May—by issuing a series of tax tips and reminders to small-business owners. Here are six items covered during the week:
1. Sharing economy: The sharing economy, which includes everything from ride-sharing services to spare room rentals, is taking the nation by storm. The IRS cautions that income derived from these activities is generally taxable, though you may be entitled to offsetting deductions. If you're making money from such ventures, you'll need to pay estimated taxes and payroll taxes for any employees every quarter.
2. Worker credits: A business can claim the Work Opportunity Tax Credit (WOTC) for hiring workers from one of 10 target groups. Generally, the WOTC equals 40% of a worker's first-year wages for a maximum credit of $2,400. If you hire a disabled veteran, you may be eligible for a credit of as much as $9,600. You have to meet special certification rules to claim these credits.
3. Hobbies: Even if you engage in an activity mainly for personal pleasure, income you earn from this passion usually is taxable. Normally, you can deduct related expenses, but only up to the amount of your hobby income. If you're truly trying to turn a profit, however, you may deduct a loss. The IRS relies on nine key factors to determine whether your activity is a hobby or a business.
4. Research credits: Your firm may qualify for a 20% research credit on qualified expenses to offset income taxes. Plus, under a 2015 tax law change, a qualified small business can apply up to $250,000 of its available research credit against payroll tax liability. To qualify for the current tax year, your business must have gross receipts of less than $5 million and can't have had gross receipts prior to 2012.
5. Home office deductions: To qualify for these deductions, you generally have to use a portion of your home regularly and exclusively as your principal place of business or as a place to meet customers, clients, or patients in the normal course of business. The IRS reminds taxpayers that they can deduct actual expenses proportionately, based on the size of the home office, or claim a simplified deduction of $5 per square foot up to $1,500.
6. Worker classification: The IRS has outlined the rules for classifying workers as either employees or independent contractors. The difference is important, because an employer has to withhold income taxes and pay payroll taxes on wages for an employee, but not for payments to independent contractors. The control the employer has over the worker and the nature of the relationship are two key elements.
Don't leave matters to chance. Seek professional tax assistance for your situation.
This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.