As a self-employed individual, you can feel overwhelmed, when you search for strategies to reduce your taxes. It is challenging to avoid paying the self-employment tax entirely.
However, you can reduce the amount of self-employment tax that you owe, you know? So, where do we start?
What is Self-employment tax?
As we know for most workers, the employee and employer have to pay Social Security & Medicare and split the cost. They would each pay 7.65 percent of the employee’s eligible wages.
As a Self-employed, in the eyes of the Internal Revenue Service (IRS) you are both the Company and the employee, so you are responsible for both halves, or 15.3% of earned income and that is known as self-employment tax.
Instead of feeling overwhelmed, you can start with the below 10:
- Use the Section 105 – HRA Family Medical Expense plan to make your health insurance a tax-favored business deduction on your Schedule C.
- If Married – Hire your spouse as an employee
- If Single – Form a C Corp to create a Business deduction
- Employ your under-age-18 child to make taxable income disappear.
- Employ your spouse without paying him or her a W-2 wage.
- Rent your office, even your home office, from your spouse to save self-employment taxes.
- Establish that an office in your home is your principal office to increase (yes, increase!) your vehicle deductions and also turn personal home expenses into business expenses.
- Give yourself flowers, fruit, and books as tax-deductible fringe benefits.
- Combine the home office and a heavy SUV, crossover vehicle, or pickup truck to grab big deductions this year.
- Design a business trip that includes some personal days—weekend and standby days — days you treat as 100 percent business even though you don’t work on those days.
- Use the seven-day tax deduction travel rule to create a business trip that is 87 percent personal vacation.
- Deduct your smartphone and provide smartphones to your employees as tax-free fringe benefits.
To Sum Up
Whether you choose to form an S-corp or use another approach, efficiently reducing your self-employment tax can be complicated.
The best way to do it may change from year to year, especially as self-employment tax rates and income subject to these rates can vary annually.
Get the help of a tax professional who specializes in self-employment to make sure you file your taxes accurately.