The IRS can take a big tax bite out of your small business bank account if you don’t pay attention to “Self Employment tax”.
What is it? Self employment tax is how Uncle Sam collects Social Security and Medicare money from those who don’t have an employer deducting it from your paycheck. It’s included as part the Form 1040 Income Tax Return you file every April 15th.
Did you know 80% of businesses operate as a Sole Proprietorship in terms of their legal entity structure? You do too if your business is not incorporated. This means most small business owners waste thousands in taxes that they shouldn’t have to pay, year in, year out. When you operate as a Sole Proprietor, you’re not only liable for income tax, but also self employment tax. If you’ve formed an LLC, or a Partnership, it’s likely you are in the same boat; you also meet the IRS definition of ‘self-employed’.
Let’s pack some dollars into this tax equation. Say you’re in the 20% income tax bracket, and on top of that you pay 15% in self employment tax. What that means to you, if your business nets $70,000 in net income this year, is that you’ll pay a combined 35%–or 35 cents on every $1 of net income–on taxes. In this case, that adds up to $24,500. We’ve not factored in your standard deduction or personal exemptions to keep the math straightforward, but even so, it’s a big tax bite.
The good news is that it’s possible to structure your business in such a way as to legally avoid self employment tax. In fact, business structure is just one of many pro-active tax strategies we use to help business owners save thousands on taxes every year. In this way, we help business owners pay themselves, not the IRS. It doesn’t matter whether you operate your business part-time from home, or full-time from an outside office–you can benefit either way.
If you’d like more information our proactive tax planning service to help reduce Uncle Sam’s tax bite, just let us know.
Till next time, big success to you and your small business.