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Tax Planning Never Stops: When You're a Boss

Making Plans

Self-employment is the opportunity to be your own boss, to come and go as you please. If you're self-employed, you'll need to pay your own Social Security and Medicare taxes and take charge of your own retirement plan, among other things. Here are some planning tips.

Understand self-employment tax and how it's calculated

As a starting point, make sure that you understand (and comply with) your federal tax responsibilities. The federal government uses self-employment tax to fund Social Security and Medicare benefits. You must pay this tax if you have more than a minimal amount of self-employment income. If you file a Schedule C, the net profit listed on your Schedule C is self-employment income and must be included on Schedule SE which is used both to calculate self-employment tax and to report the amount of tax owed.

Employ family members to save taxes

Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you.

As a business owner, you're responsible for paying FICA (Social Security and Medicare) taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won't be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal, state and local income taxes.

Take full advantage of all business deductions to lower taxable income

Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled. You may be able to deduct a variety of business expenses, including rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. Some everyday personal expenses may be related to your business. Take a fresh look at your daily activities and make sure you're not missing any deductions.

Before the year ends, consider the following:

  • Mileage from home to work is not deductible but what if you work from home?

  • Family party expenses are usually personal but what if you employ a family member?

  • Did you pay for some apps on your phone that are used for business purposes?

  • Did you meet a new client or customer at the local sporting event?

  • If shopping for a new car is it better to buy or lease?

Self-employed taxpayers who work from home and have separate cars for personal and business use have numerous business expenses they may not be aware of.

Deduct health-care related expenses

You may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents on the front of your federal Form 1040 (i.e., "above-the-line"), so it's deductible whether you itemize deductions or not.

Contributions you make to a health savings account (HSA) are also deductible "above-the-line." An HSA is a tax-exempt account you can establish in conjunction with a high-deductible medical plan to set aside funds for health-care expenses. If you withdraw funds to pay for the qualified medical expenses of you, your spouse, or your dependents, the funds are not included in your adjusted gross income.

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