When you pay tax as self employed it might look as if you are paying much more than you did as an employee, even if you did not earn more money as self employed. This is chiefly because when you were an employee, your employer paid a part of the tax for you before you even saw the money. When you are self employed, you are required to pay at least two different types of tax – regular income tax and self employment tax. Your self employment tax will be calculated in accordance with the amount of business earnings that you report on Schedule C. As of 2003, the self employment tax is 15.3 percent of your net earnings. The major part of this is for Social Security, while less than tree percent goes to Medicare.
When you are self employed it is important that you keep track of all your self employment tax deductions payments, otherwise you will end up paying too much in self employment tax. You will be allowed to make self employment tax deductions for a multitude of different expenses that are necessary for your business. Another difference from being an employee is that the 2 percent limit for non-reimbursed employee business expenses will exist no more, and you will instead be allowed full self employment tax deductions for your expenses.
The business use of a car or other vehicles is one large self employment tax deduction for many companies. The allowed self employment tax deduction for cars can change from year to year, so it is important to stay updated. You can choose between a standard mileage self employment tax deduction or make a self employment tax deduction for the actual cost. This self employment tax deduction should no only include costs for gas, parking, tolls and such, but also take depreciation into account. Leasing your business car instead of buying it can sometimes be a good idea when it comes to self employment tax deduction. Expenses related to a trip or vacation can be included in your self employment tax deductions as long as the primary purpose of the trip was business and not pleasure.
It is quite common for self employed persons to hire their spouse, since this will increase the amount of possible self employment tax deductions. You can for instance be allowed self employment tax deductions for costs that you have reimbursed to your spouse under your health plan. Health plan reimbursements will not be viewed as taxable income for your spouse and be allowed self employment tax deductions for you; two facts which make this a very good way of maximising your self employment tax deductions. If your spouse is an employee in your business, you can bring him or her along on business trips as long as you can argue why his or her presence was necessary for business. The costs for brining your spouse along, such as tickets and meals, will then be considered legitimate self employment tax deductions. The IRS can naturally always claim that your spouse was not necessary for the trip and refrain from granting you your self employment tax deductions, so it is central only to bring spouses that actually work in your business.
It is naturally important for you to set up a retirement plan and you will fortunately be allowed self employment tax deductions when you arrange such a plan. Most self employed finds the SEP IRA the easiest retirement plan to arrange and stick to, and it is also comparatively easy to make self employment tax deductions for the SEP IRA. If you want an even higher self employment tax deduction, you can instead opt for the Keogh plan since this plan increase the size of allowed self employment tax deductions. Keep in mind that a Keogh plan must be set up well in advance for you to be allowed to make any self employment tax deductions.