You Can Reduce Self-Employment Tax. Here’s How!
Due to the high self-employment (SE) tax all the self -employed people are very annoyed. There is a valid reason for them being frustrated; SE Tax is double the federal payroll tax. A self employed person has to pay 15.3% of SE Tax whereas an employee just pays 7.65% federal tax.A Schedule C filer is in existence which helps in the lowering of SE Tax. The three tips on reducing the SE Tax are as following. The advantages and disadvantages of the schedule are also mentioned in the points to follow.
1. Home office deduction: Of the two deduction schedules A &C, the former shows income tax reduction and the latter shows income tax reduction and SE tax. Rumors are afloat about showing the home office deduction. A few are of the opinion that the very mention of home office deduction will attract scrutiny which is untrue; the very action of excluding the office deduction will surely warrant coughing up heavy tax amount. It is also the general belief that projecting mortgage interest and property tax on Schedule A or the projection of office deduction on Schedule C will invite same amount of tax. This is again untrue.
2. There is a deduction allowed for tax preparation fees. These fees can be listed on Schedule C of your return, allowing you to deduct them from your income and self-employment taxes, if applicable. You may choose to list these fees on Schedule A, but the tax benefit will be lower. You should always try to reduce the taxes you pay by as much as you can - legally.
Using Schedule A, what you deduct is restricted to 2%, with the implication that the taxed party must make adjustments in deduction miscellany to total 2% of adjusted gross income. This restriction of deductible amounts listed as miscellaneous is a disadvantage of using this tax schedule.
Schedule C has certain limitations. You can mention only the Tax preparation fees, which are the fees you pay for business work done by your accountant. The accountant fees should be split in to two forms, the business form and non-business form. The business forms includes Schedule C, Form 8829 and 4562 and Schedule SE. The non-business forms include Schedule A and Form 1040.
Don’t forget to include the work like bookkeeping, software consulting, paycheck processing or payroll tax returns done by your accountant.
3. Tax Preparation Software Programs: The tax code is often complicated and includes many calculations which are not obvious to the uninitiated. Many good tax software programs, very economical, exist to help the taxpayer to complete an error free return. As examples, taxes on business expenses and profits are somewhat confusing. The self employment tax is a good example , as the Medicare and Social Security portions are easily determined with a good software program. Additionally, you are allowed to take a 50% deduction on the amount of your SE tax obligation - that will be entered on your 1040 form. A good tax software program will lead you step by step through the tax preparation process - and help to eliminate errors.
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