Here are some Self Employment Tax reduction tips that will ensure that you don’t need to pay a cent more in taxes, than regulated by law.
- Defer Income and Avoid High Tax Brackets: The #1 strategy for Self Employment Tax reduction is deferring self employment income by contributing to a SEP-IRA, SIMPLE IRA or a solo 401(k). As a self employed, you can choose to get paid whenever you want. It may sound foolish to you to take payment later than now, consider the scenario: Let’s assume that you’re still to receive $20,000 in net income even after taking all the deductions according to tax regulations for 2013. If you even arrange to get paid an amount of even $2001 in Jan 2011 by postponing it, you are taxed only by 10%-15% rather than by 25%.
- Start an S Corporation: According to IRS, Self Employment Tax applies to only the ‘earned income’, or money paid as salary or wage and doesn’t include the dividends which are known as ‘unearned income’. Creating an S Corporation helps you receive business income in form of dividends. What happens here is, the payment is done by clients and customers to the corporation rather than giving it directly to you. Then, you begin withdrawing the salary from the corporation which is not a full salary. You pay 60% as salary and 40% as dividends which makes that 40% non-taxable.
- Valid Business Expense Deduction: Business owners are allowed by IRS to deduct all business expenses that are ‘ordinary and necessary’. For instance, you take a trip to Las Vegas and write it off, unless you went there for work purposes. However, anything that is used to generate income can be deducted, which includes office space, stationary, advertising costs, business travel etc. So, if you’re racking up around $5,000 business expenses a year, you can reduce your total taxable income by $5000.
- Deduct the Cost of Health Insurance: You can also facilitate self employment tax reduction by deducting the costs of health insurance. You can deduct the full amount of health insurance that you buy for yourself/your spouse/your dependents so long as you had net profits in the year. This reduces your taxable income.
- Subtracting Half of FICA Taxes from those of Federal Income: You are also entitled to deduct half of your self employment taxes from your federally taxable income. While your self- employment tax may not be reduced, the total amount of tax you pay is lowered.