Tax Guide: Tips for the Self-Employed

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Chapter 3
Tips For The Self-Employed
Tax Strategies for 1998

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

Establish a Keogh retirement plan before December 31, 1997. If you are self-employed and want to deduct contributions to a new Keogh retirement plan for the 1997 tax year, you must establish the plan by December 31, 1997. 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 require-ments, you may be able to expense up to $18,000 in purchases of qualifying property placed in service during 1997, instead of depreciating the expenditures over a longer time period. For 1998, this limit rises to $18,500.

Important!

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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 1997 standard deduction will shelter the first $4,150 of wages from tax. In essence, the parent is able to shift $4,150 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% S corporation shareholder-employee), for 1997 you may deduct 40% 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.

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