3 Tips to Reduce Self-Employment Tax



Posted: Friday, March 13, 2009

by Ron Finkelstein
Tax Deductions

All the self-employed people are annoyed with the high self-employment Tax. There is a valid reason to be frustrated; SE Tax is twice as the federal payroll tax. Where a employee pays 7.65% federal tax, a self employer has to pay 15.3% of SE tax. There is a Schedule C filer which helps to lower the SE Tax. Three Tax Tips to reduce the tax are as follows. The pros and cons of the schedule are also mentioned in the following points.

1. Home office deduction: Schedule A deduction reduces income tax where as Schedule C deduction reduces income tax as well as SE tax. There are some rumors on showing the home office deduction. Some believe that mentioning the home office deduction will invite an audit which is not true; not including the deduction will definitely result into high tax payment. People also believe that they have to pay the same amount of tax if you show mortgage interest and property tax on Schedule A or if you show home office deduction on Schedule C, which is not true.

2. Tax preparation fees deduction: Mention the tax preparation fees on Schedule C and reduce both income tax and SE tax. One can also show the tax preparation fees on Schedule A but there will be less benefit. So always prefer to reduce your taxes.

In Schedule A the deductions are subject to 2% limit which means that the tax payee has to adjust his miscellaneous deductions to a amount equivalent to 2% of the Adjusted Gross Income. So any number of deductions you mention under "Certain Miscellaneous Deductions" there is a defined limit, which is a drawback of this schedule.

There are some limitations in Schedule C also like the only Tax preparation fees you can mention is the fees you pay to your accountant for the business work he does. The accountant fees has to be divided into business forms (like Schedule C, Schedule SE, Form 8829 and Form 4562) and non-business forms (like Form 1040 and Schedule A).

Don't forget to include the work like bookkeeping, software consulting, paycheck processing or payroll tax returns done by your accountant.

3. Tax Preparation software program: There are many calculations to be done while filing Schedule C. Though the tax appears to be 15.3% it is not. First of all the tax is not paid on 100% of the profit but it is paid only on 92.35% , secondly fill in form 1040 and take a 50% deduction on SE Tax. And there is also some calculations on the Medicare portion and the social security portion of the SE Tax. All this seems to be a little complicated, so it is always good to use a software program which can be purchased paying a few dollars.
 
Learn How to Deduct Mileage for Commuting and other hidden Tax Deductions that can save you tons of money. Ron Finkelstein is NOT a Tax Attorney or an accountant. He is merely a small business owner who has paid a lot of money over the years to learn a whole lot about Taxes and Time Management. I hope you enjoyed learning how to maximize your qualification limits on tax credits and deductions
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