How to go in alone

PBN Staff

05/01/2010

Self-employment is a terrific opportunity to be your own boss, do something you love and build value over time. Being your own business also brings with it a unique set of tax advantages and tax pitfalls that you need to know about. For example, you’ll need to pay your own FICA taxes and take charge of your own retirement plan, among other things.
Here are some tax tips and traps for the newly self-employed:
&#8226 Avoid a self-employment tax surprise. Self-employment first-timers often trip on this one. When you have a job, your employer pays half of your social security taxes and you pay the other half. When you’re self employed, however, you pay it all – making both Social Security and Medicare payments (jointly known as FICA taxes) through the self-employment tax.
&#8226 Pay your own “withholding.” Instead of having taxes automatically withheld from your paycheck, you’ll now be responsible for pay-as-you-go taxes in the form of “estimated tax.” You’ll need to make quarterly estimated tax payments using Form 1040-ES to cover your federal income tax and self-employment tax liability. You might have to make state estimated tax payments, as well. If you don’t make estimated tax payments, you may be subject to penalties, interest and a big tax bill at the end of the year.
&#8226 Hire 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. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn’t seem reasonable, considering the services performed. Also, when hiring a family member who’s a minor, be sure that your business complies with child labor laws.
If your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won’t be subject to FICA taxes.
&#8226 Set up a self-employed pension plan. The ability to set up a generous, tax-advantaged retirement plan is one big benefit being self employed. Possibilities include: Keogh plans; Simplified Employee Pension (SEP); SIMPLE IRA; SIMPLE 401k or an Individual (solo) 401k.
&#8226&#8226Enjoy all Your Business Deductions. You can deduct a wide range of business expenses, including rent or home office expenses, and the cost of office equipment, furniture, supplies and utilities. &#8226

Daniel Kehrer can be reached at
editor@business.com.

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