2000 Tax Guide: Tips for the Self-Employed

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Chapter 3
Tips For The
Self-Employed
Tax Strategies for 2000

Mind self-employment
taxes, and
consider hiring
your children.

Establish a Keogh retirement plan before December 31, 2000. If you are self-employed and want to deduct contributions to a new Keogh retirement plan for the 2000 tax year, you must establish the plan by December 31, 2000. You don’t actually have to put the money into your Keogh(s) until the due date of your tax return. Consult with a specialist in this area to ensure that you establish the Keogh or Keoghs that maximize your flexibility and your annual contributions. Keogh plans are discussed in Chapter 6.

Take advantage of section 179 expensing. If you meet certain requirements, you may be able to expense up to $20,000 in purchases of qualifying property placed in service during 2000, instead of depreciating the expenditures over a longer time period.

If you’re self-employed, consider employing your under-18 child. A child who is under age 18 and employed by his or her self-employed parent in an unincorporated business is not subject to FICA taxes, and the parent is not responsible for paying the employer’s portion of FICA taxes. Additionally, the parent is allowed a tax deduction for the wages paid to the child, and the child’s 2000 standard deduction will shelter the first $4,400 of wages from tax. In essence, the parent is able to shift $4,400 of his or her income to each child tax free. Children’s income taxes are discussed in Chapter 8.

Don’t forget deductions for health insurance premiums. If you are self-employed (or are a partner or a 2-percent S corporation shareholder-employee), for 2000 you may deduct 60 percent of your medical insurance premiums for yourself and your family as an adjustment to gross income. This percentage is scheduled to increase in future years. The adjustment does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income from the business under which the plan was established. You may not deduct premiums paid during a calendar month in which you or your spouse is eligible for employer-paid health benefits.

Review whether compensation may be subject to self-employment taxes. If you are a sole proprietor, an active partner in a partnership, or a manager in a limited liability company, the net earned income you receive from the entity may be subject to self-employment taxes.

		Consider whether you are eligible to claim a home office deduction. A home office is deductible if it is used exclusively and regularly in your trade or business, even if only to conduct administrative or management services. Also, there must be no other fixed location of the trade or business where administrative or management activities can be conducted. However, consideration should be given to the future availability of the exclusion of gain from the sale of your principal residence. If a home office deduction has been claimed, the sale of your principal residence would be treated for tax purposes as two separate transactions: a sale of a principal residence and a potentially taxable sale of business property.

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