ValueYourMoney.org
Tax Talk 2017 FAQ
Tax Talk

Tackling Taxes If You’re Self-Employed

Tax time is tough, there’s no question about it, but it’s even more challenging when you’re self-employed and trying to deal with the sometimes confusing rules and recordkeeping that go hand in hand with running your own show. The Texas Society of CPAs answers some of the most frequent questions about taxes and self-employment, offering tips that can help lower your tax bill.

What Qualifies as Self-Employment Income?
Self-employment (SE) income is money earned as an independent contractor or in running your own business. It may include earnings from part-time work even if you are employed elsewhere in a job as an employee. Taxable SE income is what’s left after qualified expenses are deducted. For instance, if you make $50,000 selling jewelry and your ordinary and necessary costs of doing business total $21,000, your SE income is $29,000. Your taxes on that amount will include your regular tax bracket rate  as well as SE tax, which consist of Social Security and Medicare taxes. Be aware that the SE tax rate is  15.3%. Since you don’t have an employer withholding SE taxes, you generally must pay estimated quarterly taxes.

What’s One Great Way to Minimize Your SE Taxes?

Contributing to a tax-advantaged retirement plan enables you to accomplish two important goals. First, the money you deposit into a qualified plan is deducted from SE income, which immediately reduces any taxes you might owe. Second, it offers a tax-beneficial way to build up a fund you can tap upon retirement. This is particularly important for self-employed workers who don’t participate in an employer-sponsored plan. Self-employed people or business owners are eligible for several different kinds of tax-advantaged retirement plans, which include one-participant 401(k) plans, Simplified Employee Pension IRAs, and SIMPLE IRAs. Be sure to ask your CPA for more details about retirement savings options and how they lower your tax bill. 

What Other Deductions Are Available? 
If part of your home is used for business, expenses related to that portion of your home can be deducted. You can even use a simplified option that makes it easier to calculate the proper deduction. To qualify for the deduction, the home office must be your principle place of business and it must be used regularly and exclusively for that business. You can also generally deduct any other business-related costs, including office or storage space rental or purchase, supplies and equipment, phone, travel, automobile mileage, advertising, and wages paid to any employees or contractors. Expenses for education that relates to self-employment also may be deductible. Consult your CPA to be sure you’re taking all the deductions for which you qualify. 

How Can I Make My Business More Successful? 
Whether you’re just starting out or considering how to take your business to the next step, there are various tax and business planning considerations that can provide sound financial grounding. Remember that taxes are not the only important issue if you’re self-employed or own a small business. Have you also considered the possible advantages of adopting a more formal business structure for your enterprise? Limited liability companies work well for many one-person businesses and they generally don’t complicate income tax filing requirements. If you have or plan to add a partner or other investors, then a partnership or a C or S corporation may better suit your needs. Your CPA can explain all the options and the specific benefits and potential drawbacks of each one. 

Turn to Your CPA
Don’t tear your hair out when tax season rolls around! If you’re on your own, your CPA can offer the perspective and expertise needed to both reduce tax bills and to plan for a successful future. 

Copyright The American Institute of Certified Public Accountants.



 American Institute of Certified Public Accountants Texas State Board of Public Accountancy