Tax Planning for the Self-Employed
The IRS considers any individual self employed if they carry on a trade or business as either a sole proprietor, and independent contractor, or a member of a partnership, or if you are in business for yourself. You can have a regular full time job and still have self employment income from a side job.
For self-employed individuals you have to pay self employment tax on any self employment income. As you file your individual income tax return you will need to fill out the Schedule C and the Schedule SE which is used to calculate the self-employment tax. Self employment tax is used by the government to fund social security and medicare benefits.
Self employment tax rate on the net earnings is 15.3% with the majority of that going to social security. All net earnings over $400 will be subject to Medicare as well. The social security tax on self employment income will max out at about $102,000.
So how can you avoid paying too much in self employment tax?
- Shifting and Timing: You can shift income to family members in lower tax brackets, but be careful because the IRS could question unreasonable amounts of compensation paid to a family member.
- Planning Retirement: By creating a retirement plan and saving for your future you can avoid paying taxes on those contributions
- Employee Benefit Plans: Medical plans for yourself and your employees can help reduce tax liabilities
- Business Expenses and Deductions: Make sure that your business is utilizing all the available deductions and credits possible.
- Hobby Classification: If your business is constitantly showing a loss the IRS may question if what you are doing is a business or just a hobby. Make sure that you are showing some gains.
If you need help planning or preparing your self employed tax return consult the Tax Professionals of Utah County.