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Ahh, the joys of self-employment – being your own boss, setting your own hours, doing what you like, and, oh yes, establishing a life-long bond with your accountant. Being self-employed also means being responsible for a wide range of critical tax-related duties.
And make no mistake. Taxes are a year-round responsibility – not just something you think about each March or April. Estimated taxes, tax planning and retirement plans, for example, are three tax-related items you need to act on throughout the year.
For new business owners, taxes are a good-news/bad-news proposition. While many tax traps can bite you, there are also attractive tax perks. Here are some tax recommendations for self-employed entrepreneurs from top tax pros:
• Understand the self-employment (SE) tax. Newly minted solo operators are often stunned to discover there’s an additional tax for being self-employed. Here’s why. When you work for someone else, your employer pays part of your Social Security and Medicare taxes. People who are self-employed must pay both portions.
You can calculate self-employment tax (SE tax) yourself using Schedule SE (Form 1040). Social Security and Medicare taxes of most wage earners are figured by their employers.
• 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. But the IRS can question compensation to a family member if it’s unreasonable for the services actually performed. So be sure to pay a market rate.
• Deduct health care related expenses. You may be able to benefit from the self-employment health insurance deduction, which lets you deduct up to 100 percent of the cost of health insurance for yourself, your spouse and your dependents. This deduction is taken on the front of your federal Form 1040 when computing your adjusted gross income, so it’s available whether you itemize or not.
• Take all the business tax deductions you can. For example: Deduct business expenses for operating your car, truck or van. Use either the standard IRS mileage allowance (56.5 cents per mile in 2013), or your actual business-related vehicle expenses.
• Give your CPA good information. Use a popular small-business accounting package such as QuickBooks to keep track of your finances. Visit www.quickbooks.com. •