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Barbara, username Wingman asked the next question and he wants to know:

I am self-employed and my wife has purchased both health care coverage and extended care coverage for the both of us. Can I deduct the portion of these insurance policies that are attributable to me if that can be determined? I think we can look at her basic coverage for employee only and deduct the additional premiums that is being paid to extend the coverage to me.

Barbara, the next question comes from LT Lawn Care and the user asks:

I bought into a pre-paid legal plan last year, initially for my personal use but because of a potential law suit that was threatened against my business, I used the service at times for the business as well. My question is can I write the $39.99 a month premium off as a business expense, given I did use the service for my business too?

Community Members,

Great questions so far! Barbara is here to help so if you have additional business tax questions and you want Barbara's opinion don't to hesitate to ask! We will be accepting your questions throughout Barbara's time on the site.

As an LLC member, you are automatically a self-employed person. A one-member LLC is a "disregarded entity" that reports business income and expenses on Schedule C and pays self-employment tax on net earnings (essentially profits). Taking a draw from the business has no impact on your income taxes or self-employment tax. There is no such thing as "salary" when it comes to a self-employed person because a self-employed person is not an employee. Whether the LLC is the best entity choice (or whether you want to combine entity choices) is discussed in my article on the home page ("Changing to the Type of Entity That Is Right for You").

Income from a hobby activity must be reported; there's no exemption in the tax law that makes this income tax free. There's no magic number to reach before having to report your income (there's no dollar amount or total number of sales). However, only report your net income (not the total sales proceeds you receive). Net income is the sales proceeds minus your inventory costs and other business expenses. You can deduct business expenses related to your eBay selling activities, including eBay fees, PayPal fees, shipping materials,etc. You need to figure your inventory costs too unless you have no cost (because you found your items or created them at no expense). Caution: If your total expenses exceed your revenue, then under the "hobby loss rule" (a special tax rule), you can only deduct expenses to the extent of your income from the activity. For more information about hobby income and losses, see information from the IRS at www.irs.gov/newsroom/article/0,,id=169490,00.html.

Whether you have a full-time or sideline business, you must report your income and expenses. As a sole proprietor, you report income and expenses on Schedule C, which is filed with Form 1040. You do not need a fictitious business name (unless you want one). For example, a freelance writer would report the income and expenses under his/her Social Security number (or employer identification number) on Schedule C; no separate business name is necessary. To learn more, see IRS Publication 334, Tax Guide for Small Business, at www.irs.gov. Note: You may also owe self-employment tax on your net earnings as well as having to file quarterly estimated taxes to cover the tax bill for your sideline business (and the self-employment tax related to it).

How to treat the costs of owning and operating a business-owned car that you also personally use depends somewhat on the type of entity you have. For example, if you have a corporation, it can deduct all car expenses (subject to certain limits in the tax law). However, your personal usage of the company car as an employee of the corporation is a taxable benefit to you (there are various ways that the corporation accounts for this usage). For more information about this, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, at www.irs.gov.

Barbara,

Our next question was posted by user Pablo14 and the user asked a question that received a great deal of responses from other community members, so we'd like you to weigh in on it. And the question is:

Does an LLC need to pay Self Employment taxes?