Reduce Your Self Employment Taxes With These Strategies

Photo of author
Written By Adrian Cruce






Self employment is great but when thinking about taxes, problems tend to appear for most of those that want to be on such a life path. The law is quite complicated to understand but if you take it one place at a time, you will find it easier to manage everything. Let’s start with the taxes and how you can reduce them.

Deferring Income – Avoiding High Tax Brackets

The best possible strategy to reduce self employment taxes is to defer the income towards solo 401(k), Simple IRA or SEP-IRA. You will be able to get paid when you want to as a person that is self-employed. You can take payments a little later, allowing you to reduce 25% of your taxes, which can be quite high for a lot of people.

S Corporations

The self employment taxes are only applicable for earned income or for wages/salary money. Taxes will not include dividends. They are unearned income. When you create an S Corporation, you will gain income through dividends. Payments would be made by customers/clients to corporations and you do not directly get money. Withdrawing can be done in a similar way to the salary. It is not at all difficult to save even 40% through such a move.

Business Expense Deductions

The business owner can deduct business expenses when they are labeled as ordinary and necessary. As an example, it is not possible to go on a vacation and write it off but you can go to Costa Rica for work purposes and deduct expenses. All that you use in order to generate income is an amount that you can write off. This includes stationary, office space, business travel and advertising costs.

Related Article:  How To Know If The Financial Plan You Have Is Not Working

Health Insurance Cost Deduction

Self employment tax reduction facilitation is made easier through health insurance deduction. Full amounts can actually be deducted when you buy health insurance for dependents, your spouse or you. The only situation in which you cannot is that in which you did not generate profits in the past year.

Federal Income Tax Deductions

You can actually deduct 50% of the FICA taxes from federal income that is taxable. That would not directly reduce self-employment taxes but you get to reduce the total tax amount that you have to pay.