0 Comments | Mar 03, 2014 | Written by: Dave Donovan
Taking the Mystery Out of Self-Employment Taxes
Nobody likes doing their taxes, but if you are self-employed, then doing your taxes can take on a whole new level of hurt. As every year passes, self-employment tax laws become increasingly complex and whether you are in your first year as a sole proprietor or you have been at it for a decade, it is always surprising to see how much tax you have to pay.
Since taxes are unavoidable, so you have to make the best of it. Luckily, there are some things you can do to help lower your self-employment tax in 2014. Here are a few tips to try.
Change Your Business Structure
If you are a sole proprietor, then you are required to pay self-employment taxes on your first $113,700 of income. But, if you were to change the structure of your business to a corporation or an LLC, then you can significantly reduce your self-employment tax and here’s why:
As a sole proprietor, any income your business generates is self-employed income, meaning that is how much the IRS considers you made. When you have a corp or an LLC you have to assign yourself a salary and that amount is what you will be taxed for. For example, if your sole-proprietorship brings in $100,000, then you will have to pay
self-employment tax on the entire amount. On the other hand, if you are a corp or an LLC and you make the same amount, you can pay yourself a reasonable salary, like $55,000, and you will only have to pay SE taxes (which include social security and Medicare) on that amount.
Of course, changing your business structure can make your life more difficult in a variety of other ways, so it is important to really consider all of the pros and cons of doing so before you make that decision.
Reduce Your Net Profit
Your business’s net profit is its gross revenue minus any deductible business expenses. By deducting every allowable business expense, you may be able to make a significant dent in your net profit and this will reduce the amount of self-employment tax you will have to pay. Deductible business expenses can include the amount you spend on office rent or an amount based on how much of your home is utilized for business use, office supplies, business travel expenses, computers and other business-related equipment, software, and any other expenses relating to running your business.
Keep in mind that reducing your net profit will work against you if you are considering purchasing a home in the near future. Ideally, you will want at least two to three years of maximum reported income to improve the odds of your mortgage application being approved.