Self-Employed?  Paying too much in Tax?
Check This Out We Will Save Ya Money.

As September 15th approaches, it is time for all self-employed people with profitable businesses to make their third quarter tax estimates.

  A self-employed person needs to be very careful to identify all their expenses they incur as an “ordinary and necessary” expense to run their business.  Consider items such as auto expenses, use of your home or apartment, business use of computers, etc.  But, many of these items are subject to special rules - for example auto expenses need “contemporaneous” documentation regarding what the business mileage is incurred for

It may sound too simple, and that the above is no big deal.  Look at the following example, both clients are single.  

  Description

(All items use 1998 tax

rates and rules)

 

Gross (Collected

    Income from

    Services)

 

Expenses that are

   Justifiable, but

   Need searched out

 

Net Business Income           

   (Income Self-

    Employment

    Tax is Assessed on)

 

Less, Standard

    Deduction

 

Less, Personal Exemption

 

Taxable Income     

 

Tax on Income

 

Self-Employment

   (Social Security Tax

     On Net Business

     Income)

 

Total Tax

 

  Careful Taxpayer

 

 

 

$10,000

 

 

 

   4,000

 

 

 

$ 6,000

 

 

 

 

4,250

 

 

2,700

 

None

 

None

 

 

 

 

848

 

$ 848

 

  Casual Taxpayer

 

 

 

$10,000

 

 

 

not considered

 

 

 

$10,000

 

 

 

 

4,250

 

 

2,700

 

$3,050

 

$ 458

 

 

 

 

1,413

 

$1,871


 With proper planning, and as the above taxpayer’s income increases so there is some flexibility beyond the daily necessary living expenses, there are other options that can decrease tax for the “careful” taxpayer, such as setting up retirement plans, home purchases (to provide more deductions for income tax) and other considerations.  Even on a simple situation such as shown above, the tax difference can be significant - get proper advice and assistance if you are self-employed!

In addition to the above tax differences, if you do not make your quarterly estimated tax payments as a self-employed person, then you will have additional penalties - it’s worth handling the above issues correctly.


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Last modified: November 08, 2002