Small Business Taxes - How To Pay Less Self-Employment Tax
If you belong to one of three categories, this article is for you: 1) you own a sole proprietorship, 2) you are a member of an association, or 3) you are the owner of a limited liability company to pay taxes as a sole proprietorship or partnership. What these three types of business owners have in common? They are faced with the dreaded self-employment (SE) tax on profits of your business.
If you are new to the world of small business tax, here's a quick review of self-employment taxes. Sole proprietors and individual entrepreneurs imposed (ie, members of the partnership and LLC owners who have not elected to be taxed as a corporation) must pay 15.3% of its business benefits are federal taxes. This is a tax of 12.4% in social security and Medicare 2.9%. In fact, the version of self-employed tax employee payroll of 15.3% of federal employees.
But that's where the frustration starts to show its ugly head: Employees and employers each pay half of the increase of 15.3%. Self-employed workers must pay the full 15.3%. So what is a self to do? It is not a particularly effective strategy to reduce taxes legally on their own: choosing a taxable S corporation. That's how it works. In 2009, the payment of taxes on their own SE in the first profit of $ 106,800. Suppose you make $ 60,000 profit this year (sales minus expenses). You must pay SE tax on profits together, so that your SE tax will be $ 9,180 (.153 x $ 60,000).
But if you want to be taxed as a partnership, "S" can legally reduce the tax if the remuneration structure of a combination of wages (which have to do now that they are taxed as companies) and distribution to the payment of profit. Assuming that you can pay a reasonable fee for the $ 35,000 salary, that salary is only 15.3% SE tax (now called the "payroll tax" and not the SE tax). The other income $ 25,000 still to pay if you want, but do not pay tax, applied only to pay taxes on wages in the company. The result: the income tax is $ 35,000 is $ 5,355. Compare this with the $ 9,180 SE tax and you are legally reduce taxes $ 3,825. Two important caveats: First, it should be noted that only the SE taxes (or payroll tax), which has been reduced.
This strategy does not reduce taxes, because regardless of its (self-employed or an entity), the entire $ 60,000 is the income tax. Secondly, now that you are responsible for the remuneration of non-employee, a company must do all the paperwork involved in payroll. Maybe you need to pay good faith (ie, the calculation of tax at source shall be carried out). You also need all the necessary federal, state and local payroll tax returns and make all necessary federal, state and local tax payments on wages.
This can be quite a mountain of paperwork, and you should probably delegate this function payroll. This leads to a new spending to hire a bookkeeper or accountant to make payroll, but most small business owners in this situation even out the way forward.