I am self-employed, doing freelance work and using a pass-through entity (in my case the LLC) for my earnings. When you are self-employed, you are responsible for a lot more when it comes to taxes. You can also find interesting deductions where you might not expect them. The California Society of CPAs has a great list (sent to me via e-mail) of six tax strategies that the self-employed can use to increase your tax efficiency:
- Learn how the self-employment tax is calculated: You should know what is required of you when it comes to the self-employment tax, and how it is calculated. The IRS has a helpful section on the self-employment tax, keeping you updated on what is required.
- Make estimated tax payments: When you figure your tax obligation for the year, you also estimate your tax obligation for the coming year. (The IRS has a section on this as well.) You should make your payments on time so that you avoid the interest penalties that come with late payments. This payment process is also helpful, since it breaks your taxes down into manageable increments, helping you avoid the issues associated with being unable to pay taxes.
- Employ family members: You can pay family members in order to deduct the wages and FICA taxes you pay. However, you need to be careful about this, since there are rules that apply when you are a sole proprietorship and rules for when you employ minors. You also have to be careful, since the IRS could question whether you are paying family members a “reasonable” amount for their services. Find out the market value of what family employees do, and do not pay more than that.
- Establish an employer-sponsored retirement plan: You can create a retirement plan for yourself and your employees when you are self-employed. Read up on the different options, including SEP, SIMPLE, and Keogh plans. Learn about what you can do with these, and how they can help you with your taxes.
- Consider your business tax deductions: Think about home office tax deductions and other business related tax deductions that you are eligible for. This can include office supplies, Internet use, mileage driven, and other expenses. However, make sure that these are for your business, and that you are not using them for personal reasons.
- Deduct health care expenses: You can actually deduct a portion of your health insurance premiums when you are self-employed — as long as you are getting the health insurance through your own means and not through a partner’s employer. You can also keep track of medical expenses and itemize those that you are not reimbursed for, or that insurance does not pay. Contributions to a HSA are also deductible.
You might consider consulting a tax professional. I know that my accountant has been worth every penny when he prepares my taxes (the cost of the business return is tax-deductible), helping me maximize my tax efficiency.