Tax Guide: Tips for the Self-Employed

Tips for the self-employed

See our newest planning guide, with tips and strategies for 1998!

Start a Keogh plan, and employ your children.

Establish a Keogh retirement plan before the end of the year. If you are self-employed and want to deduct contributions to Keogh retirement plans for the current tax year, you must establish the plan by Dec. 31. The funding is not required until the due date of your tax returns. Consult with a specialist in this area to ensure that you establish the Keogh or Keoghs that maximize your flexibility and your annual contributions. (See Chapter 6.)

Take advantage of section 179 expensing. If you meet certain requirements, you may be able to expense up to $17,500 in purchases of qualifying property placed in service during 1996 rather than depreciating the expenditures over a longer time period.

Consider employing a child who is under age 18. 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 standard deduction will shelter the first $4,000 of wages from tax. In essence, the parent is able to shift $4,000 of his or her income to each child tax free. (See Chapter 8.)

Don't forget deductions for health insurance premiums. If you are self-employed (or are a partner or a 2% S corporation share-holder-employee), for 1997 you may deduct 40% of your medical insurance premiums for yourself and your family as an adjustment to gross income. For 1996 the deductible amount was 30%. 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.

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