Dear client,

Being self-employed can be one of the most freeing and fulfilling things in one’s life. However, with that ownership comes responsibility – specifically a 15.3% self-employment tax.

Why Do I Owe Self-Employment Tax

Self-employment tax covers Social Security and Medicare. W-2 employees “split” this rate with their employers. For entrepreneurs, the IRS treats you as both the employer and the employee, thus the higher tax rate.

Form an S Corp

The self-employment tax applies only to what the IRS calls “earned income” – that is, money paid to you as a salary or wage. There may be reasons to consider forming an S corp to save money, but they need to consider other factors like having to form a board which they don’t have to do under an LLC. It does not, however, apply to distributions (or “unearned income.”) The way to receive business income in the form of distributions is to create an S corporation. Nothing changes except that your clients or customers now pay the corporation instead of you directly. Instead, you begin withdrawing a salary from the corporation – but not a full salary. What you pay yourself in distributions will not be subject to self-employment tax.

Deduct Valid Business Expenses & Health Insurance Costs

You can deduct valid business expenses, which will lower your tax liability. For example, if you gross $50,000 but have $10,000 in expenses, your self-employment tax obligation will now be 15.3% of $40,000 (which is your net income.)

As a business owner, you can deduct 100% of health insurance premiums you pay for yourself and your qualifying dependents as long as you had a net profit for the year.

Additional Options

There are additional strategies and planning that can be done to help reduce your tax liability as a business owner. Give us a call at (402) 932-8815 to begin tax planning today!

Sincerely,

W.E. Stevens PC