According to the Small Business Administration, out of 33.1 million small businesses, 27.1 million are nonemployer small businesses—that is, “self-employed individuals operating very small unincorporated businesses, which may or may not be the owner’s principal source of income.” That makes for numerous individuals who might need a little extra help at tax time to comply with specific tax rules for the self-employed and take advantage of tax planning opportunities.
The first few hurdles surround paying self-employment tax and making estimated tax payments. Typically, employers pay payroll taxes, which fund Social Security and Medicare. Employees also pay a portion to fund Social Security and Medicare—often known as FICA on their paystub. However, self-employed individuals are responsible for paying both the employer and employee portions on net earnings of up to $160,200 for 2023 and $168,600 in 2024, in addition to federal and state (if applicable) withholding for income taxes.
While employers withhold employees’ taxes every pay period, self-employed individuals’ requirements are to send quarterly estimated taxes to the federal government, their state, and in some cases to their city or county if they expect to owe at least $1,000 in taxes. Failing to do so can lead to penalties, interest, and likely a large bill when they file.
Even though self-employment seems to incur more taxes more often, self-employed individuals have ample opportunity to control their tax situation with deductions and retirement savings. First, self-employed individuals should work with a tax adviser to find the best entity election for their tax situation. For example, single-member LLCs that have not elected to be taxed as an S corporation can deduct one half of the self-employment tax when computing Schedule SE.
Another way for self-employed individuals to significantly save on taxes is to invest in a retirement plan. Many retirement plan contributions are made pre-tax, thus lowering taxable income. However, depending on the amount they earn and can save, an after-tax Roth IRA contribution may result in eligibility for the Saver’s Credit, a nonrefundable tax credit worth up to $1,000 ($2,000 if married filing jointly) for mid- and low-income taxpayers who contribute to a retirement account.
Other deductions self-employed individuals may want to explore include health care expenses. The self-employed health insurance deduction allows self-employed individuals to deduct up to 100% of the cost of health insurance for themselves, their spouse, dependents, and employees. Additionally, if a high-deductible health plan is used, the individual can establish and contribute to a health savings account, a tax-advantaged account into which funds can be set aside to pay qualified medical expenses. Contributions to an HSA account are generally tax-deductible or made on a pre-tax basis.
Self-employed individuals may also take business deductions for start-up costs, home office expenses, business mileage, supplies, and equipment. A trusted CPA or tax adviser can help self-employed individuals maximize deductions to grow their business and personal wealth.
If you have questions on tax preparation for your self-employment, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the January 27, 2024 “Henssler Money Talks” episode.
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