Tax Small Business – How to pay less taxes self-employment
If you fall into one of three categories, this article is for you: 1) to have a sole proprietorship, 2) you are a member of a partnership, or 3) you are the owner of a limited liability company taxed as a sole individual or a company.
That these three types of entrepreneurs have in common? They all face the dreaded self-employment (SE) tax on the profits of their activities.
If you're new to the world of taxes for small businessesHere's a quick overview of self-employment taxes. Sole proprietors and those imposed as a sole proprietor (ie, partners of the Partnership and LLC owners who have not opted to be taxed as a corporation) must pay 15.3% of their profits from SE business tax for the federal government. This is the social security tax of 12.4% and 2.9% tax for Medicare. In fact, independent person version of the employee / employer pays the federal tax15.3%.
But here is where the frustration starts to rear its ugly head: Employees and employers each pay half of 15.3%. Self-employed workers must pay the full 15.3%.
What is a self-employed person to do? There is a particularly effective strategy to reduce legal self-employment tax: choose to be taxed as a company S.
Here's how it works. In 2009, the self-employed to pay SE tax on $ 106,800 of profit first. Supposemake $ 60,000 profit this year (sales less expenses). You must pay income tax IF together, so that the SE tax is $ 9,180 (60,000 x 0.153).
But if you elect to be taxed as an "S corporation", you can legally reduce taxes by structuring your salary if the combination of wages or salary (which you should do now that they are taxed as a corporation) and benefit from the distribution of payment. Assuming that you can pay a reasonable fee Salary of $ 35,000, the salary will be subject to SE tax 15.3% (which is now called the payroll tax, rather than the SE tax). The remaining 25,000 in profit can still be paid each time you want, but will not be taxed on wages because wages are only taxable wages on the payroll of a corporation.
End result: the payroll tax to $ 35,000 is $ 5,355. Compare that to the $ 9.180 in South> Taxes and reduce taxes legally by $ 3,825.
Two important clarifications: first, note that only the SE tax (or payroll tax) is reduced. This strategy is not to reduce income taxes, because regardless of the person (or company car), the entire $ 60,000 will be subject to income tax.
Secondly, now that you yourself the payment of wages or salary as an employee of a company, the company must do all the paperwork thatcomes with wages. You need to write checks you in good faith (which means that the calculation of withholding must be done). You must also submit all documents necessary federal, local and social state tax returns and make all necessary federal and local payment of payroll taxes to the State. This can be quite a mountain of paperwork and probably should entrust these tasks payroll. This means an additional expense of hiring an accountant or dopayroll, but the smaller entrepreneurs yet been released in this way.