I'm starting to go full time as a Sole Proprietorship trader does this mean I have to pay professional fees? Like most I'm trading from my house so I can get some good tax write offs. Anything else I should be careful of like with the IRS when I set this thing up? Thanks otto
If you tell the brokerage that you are now a sole proproetorship, then there's a good chance they'll rate you as a professional trader and up your fees. Don't tell the brokerage that you're a trade or business and no one else will be the wiser! IRS couldn't care less if your account is rated as a professional account or as a pattern day trading account for that matter. What counts for IRS is the amount of time and effort you expend and if the trading is significant... substantial...
Fine line at some places. If you work under a business name ie:Sole Proprietorship Trader ...you might need to pay professional fees. Yet, at other places an "individual account" is the same as a sole proprietorship account, and as long as the other qualifiers are met, then no pro fees should be applied. As for IRS: I'd go a simple individual account with treatment as a "TRADER IN SECURITIES"--if you qualify. I use www.greentradertax.com for tax help, they've got self help guides & excellent staff (expensive but great).
As a trader in futures, I would NEVER dream of saying that I am a trader on a tax form. Why would I want to pay over 15% in FICA tax? I'm an adjuct instructor at a community college, so I say that I am a "teacher" on my tax form and put my futures income on schedule 1256. That's it. Or am I missing something here?
Futures TRADERS are not normally subject to 15.3% SECA tax. To be subject to SECA/FICA/Medicare tax a futures trader would normally have to go out of his way to create it. I usually accomplish this by forming a separate taxable entity to trade through and then have the entity pay a fee/salary to the owner. WHY? So that the owner can qualify for EMPLOYEE/Self-EMPLOYED tax perks, most notably a retirement plan contribution such as a solo 401K plan. Also, by NOT filing under trader status (if that's what you are saying you do not do) you might not be getting the best tax savings milage on your expenses for quotes/seminars/equipment and so on.
I am neither a CPA nor a lawyer, so get a professional opinion before considering the following words. A sole proprietorship is not an "organized" form of business. It is simply earned income reported on Schedule C as a supplement to your individual income tax return. Organized forms of business generally have their own separate tax returns. Trading profits are generally classified as capital gains which are NOT earned income. Earned income is generally subject to FICA, also known as SE Tax [Self Employment Tax], which is about 15% for Sole Proprietors. SE Tax gets calculated on Schedule C. Capital gains are reported on schedules other than Schedule C. Capital Gains are generally not subject to FICA. An expert will have to step in to explain how this gets handled under trader status where capital gains get re-classified as net income, and then possibly carried over to Schedule C(?) I'll leave it to an expert to explain whether/how Net Income gets treated the same as Earned Income with respect to FICA. Optimal handling of the exceptions as they relate to your situation has tax implications considerably more costly than the cost of retaining a suitable CPA. The biggest challenge is NOT figuring out how to fill out the forms, but rather choosing the best combination out of your multiple choices for which forms to file. That's why some of us decide to hire a CPA. I hope you didn't think we were hiring them for their penmanship NYC also has an equivalent of SE Tax, called UBT (Unincorporated Business Tax) which gets applied to Sole Proprietors, but at least some forms of capital gains from investments are excluded.
As a trader, assuming that you are reporting your expenses on Schedule C, and your "income" on Schedule D, you are not subject to FICA tax, since it is not considered "earned" income. The drawback of this is that you cannot claim your health insurance deductions or retirement plan contributions as deductions. Health insurance can only be claimed on your Schedule A, for the amount that is in excess of 7.5% of your adjust gross income. If you form a corporation, you can pay FICA, and deduct the above, but the details are beyond my basic knowledge.
Thanks for your replies. If I already have a small business (antiques) and use schedule C, then I deduct health care costs through that. My trading expenses are basically ZERO since I use the schools T1 line and computers to trade. SOOO I think that calling myself a trader doesn't make any sense. My continued confusion is this - as a trader my income goes from passive to EARNED and therefore exposes it to FICA or to city tax or state tax (OH)? Am I correct?
Having one's income run through his own corporation (or other business) is one of the best tax reduction strategies going! You already have a Sch C for the antiques business which I'm assuming is a bona-fide business and not a hobby (IRS loves to attack antiques businesses and horse businesses as being run as a hobby). Therefore you already have those great tax deductions. Now I might think that you'd have trouble deducting dual moniters, real time quotes and charting, trader seminars and chat room fees and so on, but if these are basically zero?? as you say, then there's probably no reason for taking trader status at all. No reason necessarily NOT to take trader status either, unless you felt it added audit exposure to your tax return. Investors normally have "Investment income," not "Passive Income." Traders normally have "Caiptal Gain Income" or "Ordinary Income" and not "Earned Income" In none of these cases does the trader pay SECA/FICA, unless he arranges to do so with the use of a special purpose trading entiity. Your confusion may be that you are already familiar with the Schedule C for the Antques Business. Trader Status Taxation is completely different than most everything else in the Internal Revenue Code, which is why so few professionals practice in this often misunderstood niche area of taxation.
Hello, Thanks for the insights. My business is REAL and I have paid quarterly taxes every year. So, with little trading expenses, I don't see the need to change to trader status. In fact, one issue no one has mentioned is city and state taxes. Investment income is usually NOT taxed so this saves me about 5 or 6%. I would think that trader status EXPOSES me to these taxes. Also, should my trading success excede my earned income by a big margin, would this cause a tax issue?