When youre self-employed, whether you operate a small business or work as a contractor or freelancer, tax time can be incredibly stressful. Most people simply have their taxes deducted from their pay throughout the year, so they end up often getting a refund. If youre self-employed, its a different story.
The better you do during the year, the more youre going to find yourself paying, and if you didnt pay quarterly as youre supposed to according to the IRS, your tax bill is going to be even tougher to swallow.
Self-employed tax is what you pay on your earned income, and its designed to cover Medicare and Social Security contributions. Unless you make estimated tax payments throughout the year, your entire payment is due April 15th, and that ends up being around 15% of your total earnings in most cases, as well as whatever else you own in federal and state income taxes.
The following are some ways you might be able to minimize that burden.
Create an S Corporation
One option if youre a small business owner is to explore the options available in your state to form an S corporation. With an S corporation, your customers will pay your corporation instead of you. Then, you start the take a salary from the company. It can be smart to pay 60% of yourself in salary form, and 40% as dividends, which allows you to avoid paying self-employment taxes on that 40%.
When you set up an S corporation, if it applies to you, you might end up being able to save thousands on taxes as compared to self-employment taxes.
In some instances, you may be able to have a state business entity status thats an LLC, while the IRS status can be an S corp. Thats one of the best ways to get the legal benefits that come with being an LLC, and the tax advantages of being an S corp.
Keep Track of Expenses
The business costs you incur are a valuable way to reduce your profitability, as long as theyre legitimate and youre meticulous in how you keep track of them during the year. You can add them to your Schedule C, and if you maintain a record all year, it will be easy to make sure youre taking every possible deduction.
Just remember, they cant be personal, but they can include things like the cost of renting an office, a business vehicle, office supplies and more.
Take FICA From Your Federally Taxable Income
Another way to reduce self-employment taxes is to deduct up to half your self-employment taxes from your income thats considered taxable at the federal level. This gives the IRS a lower amount that theyre able to tax. It doesnt specifically reduce your self-employment tax, but it does reduce the total overall amount you pay because youre essentially reducing your taxable income.
Its important to remember that some of these tips, such as forming an S corporation arent ideal for everyone. Speak with an expert who can help you decide whats best for you as a self-employed business owner.