The AICPA (www.AICPA.org) is the nation’s largest professional non-profit association representing more than 340,000 CPAs that specialize in the area of tax, accounting and consulting services such as personal finance. CPAs suggest the following eight strategies entrepreneurs can consider as they prepare for the coming tax deadline:
Step 1: Understand self-employment tax and how it’s calculated
As a starting point, make sure that you understand (and comply with) your federal tax responsibilities. The federal government uses self-employment tax to fund Social Security and Medicare benefits. You must pay this tax if you have more than a minimal amount of self-employment income.
Step 2: Find the right professional.
If you plan to use a professional tax preparer, get referrals from friends, co-workers, even clients. Speak to several different professionals. Find someone with the right experience in your type of business and ask about fees and timing.
Step 3: Make your estimated tax payments on time to avoid penalties
Employees generally have income tax, Social Security tax, and Medicare tax withheld from their paychecks. But if you’re self-employed, it’s likely that no one is withholding federal and state taxes from your income. As a result, you’ll need to make quarterly estimated tax payments on your own (using IRS Form 1040-ES) to cover your federal income tax and self-employment tax liability.
Step 4: 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.
Step 5: Establish an employer-sponsored retirement plan for tax (and non-tax) reasons.
Because you’re self-employed, you’ll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan, which can provide you with a number of tax and non-tax benefits.
Step 6: Take full advantage of all business deductions to lower taxable income.
Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled.
Step 7: Deduct health-care related expenses.
If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents.
Step 8: Do additional research.
The CPA profession in the United States has created free resources and tools to help entrepreneurs with personal finance issues. To learn more check out the CPA profession’s 360 Degrees of Financial Literacy (www.360financialliteracy.org) and check out the “Entrepreneurs” tab.