Tax Planning for Self-Employed Individuals and Small Businesses
In today’s fluid economy more people than ever have been starting new businesses. This may be to follow your dream, pursue a hot new idea, or transition out of your career in corporate America into the consulting world. No matter the reason, if you are one of these people, your focus is likely on building your business and serving your customers. You may not be thinking about taxes, but you should and JMG can help.
When you are an employee, your employer pays half of your Social Security and Medicare tax. When you are self-employed you are required to pay both the employer and employee portions. This amounts to a 12.4% Social Security tax on up to $147,000 of your net self-employment earnings and a 2.9% Medicare tax on your entire net earnings.
As a business, you can write off expenses incurred through the operation of your business. Common expenses include:
- Startup costs: If you recently started a new business, you can deduct the startup costs as business expenses. Examples include legal fees, marketing costs and more.
- Vehicle expenses: Individuals who own a business or are self-employed and use their vehicle for business may deduct car expenses on their tax return. If a taxpayer uses the car for both business and personal purposes, the expenses must be split based on the portion of mileage used for business.
- Home office deduction: You can deduct your home office if you maintain a space dedicated to work tasks only. To do so, measure the square footage of your home office to determine how much you can deduct for rent or mortgage payments, utilities, insurance, depreciation, and property taxes. There is also a simplified method allowing a $5 subtraction per square foot.
- Supplies and equipment: Office supplies or equipment necessary for the functioning of your business can be deducted from your income.
- Social Security and Medicare taxes: You can write off the half you pay as the employer.
- Health insurance premiums: If you are self-employed, you might be eligible to deduct healthcare costs for you and your family. To qualify for these deductions, you must file as a self-employed individual, have paid your health insurance premiums, and be ineligible to participate in your spouse’s employer-provided health care plan.
- Other expenses to consider: These include expenses directly related to your business which may be fully or partially deductible from your income such as: travel, meals, education, communications costs, insurance, loan interest, rent, and advertising.
You may have participated in an employer-sponsored retirement plan at a previous employer. Now that you are in charge, you have many options to consider. The one that is right for you depends on your business model, number of employees, company demographics, business objectives, and level and consistency of your business results.
There are two types of plans: Defined Contribution and Defined Benefit. Each of these allow you to defer income from a period in which you may have a high marginal tax rate, to a later period, when you expect to have a lower marginal tax rate.
We will cover the complexities of this decision in a future article.
Paying Your Taxes in a Timely Fashion
Finally, as a small business, you must pay estimated taxes. The IRS expects to be paid throughout the year and if you don’t pay them as you earn, they charge penalties and interest on the unpaid balances. While you were working, your employer withheld your taxes from your paycheck to accomplish this. As a business, you must pay estimated taxes quarterly to fulfill this requirement.
As you build your business, let JMG help you plan for your future. We can help you get organized so that you are tracking the right items to maximize your deductions. In addition, we can help you shelter your income through an appropriate retirement plan and determine what to pay in estimated taxes so that you can focus on the core of the business.
If you run a business and would like to learn more, please reach out to your JMG financial advisor. If you know someone who may find it helpful, we encourage you to forward this article.
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