When you are self employed, you still owe the American government their taxes. This means you have to know how to strategize so that when it comes to taxpaying time, you will be prepared beforehand. Of course, it is important to have a good accountant, someone you can trust with your finances and who will do the right thing and handle the payment of your FICA taxes; in addition to doing your financial planning and tax planning for you. Below are some tax planning strategies that your accountant may implement if you are self employed.
Self Employment Tax Calculation
Self employed individuals, with or without an accountant must make sure to understand their responsibilities as it relates to the compliance of federal tax guidelines. This means knowing how self employment taxes are calculated by the federal government to pay the benefits associated with Medicare and Social Security. For self employed person, filing a Schedule C is essential, if filing as a contractor or sole proprietor. Net profit has to be reported on Form 1040. Schedule SE includes the self employment tax calculations and the amount in taxes owed.
Tax Payment Estimation
Once you have an estimate of your tax payment owed, you should pay it on time so you can avoid paying any assessed penalties. Since there are no withholding taxes for a self employed person, the IRS expects to be paid an estimated tax amount on a quarterly basis. If you wait until the time you are filing your taxes, the estimated amount will include interest and penalties. It is best to remain consistent in paying your estimated taxes on time and not at the end of the year.
Family Member Employees
To save on taxes, employ some of your family members. Some of the business income would then be shifted to your family members and so you could take several reasonable deductions for compensating your family members as employees, reducing your taxable income if you were reporting only your income before. Be careful with family members who are minors. You have to be in compliance with the child labor laws.
Employer-Sponsored Plan of Retirement
Due to the fact that you are self employed, you should be considering a retirement plan for yourself. To do so, establish a retirement plan that is employer sponsored. This offers some tax benefits. First, you will receive a deduction for financing the retirement plan. You can also make pretax contributions to the retirement plan, giving you more savings. Be sure to first assess all of your options.
Take advantage of all expense deductions you are allowed for your business. This puts you in a lower tax bracket. You will be able to deduct reasonable business expenses related to an office even if the office is in your home. You can also deduct for supplies, equipment, utility bills, furniture, transportation and entertainment expenses. If you want to deduct a particular expense like equipment or machinery for the business, for example, it is best to buy the equipment within the same tax year.
Be prepared in advance of a tax year to plan how you will deduct specific expenses and other ways that you can benefit from good planning.