The California Society of CPAs is
the state’s largest non-profit professional association representing more than
40,000 CPAs that specialize in tax, accounting, small business issues, auditing
and consulting services such as personal finance. CPAs are also available to
discuss other personal finance and tax issues for your audience. California CPAs suggest the
following strategies to help self-employed worker or small business owners for
the 2013 tax returns:
Step 1: Understand self-employment
tax and how it's calculated
As a starting point, make sure that
you understand (and comply with) your federal tax responsibilities. The federal
government uses self-employment tax to fund Social Security and Medicare
benefits. You must pay this tax if you have more than a minimal amount of
self-employment income. If you file a Schedule C as a sole proprietor,
independent contractor, or statutory nonemployee, the net profit listed on your
Schedule C (or Schedule C-EZ) is self-employment income and must be included on
Schedule SE, which is filed with your federal Form 1040. Schedule SE is used
both to calculate self-employment tax and to report the amount of tax owed.
Step 2: Make your estimated tax
payments on time to avoid penalties
Employees generally have income tax,
Social Security tax, and Medicare tax withheld from their paychecks. But if
you're self-employed, it's likely that no one is withholding federal and state
taxes from your income. As a result, you'll need to make quarterly estimated
tax payments on your own (using IRS Form 1040-ES) to cover your federal income
tax and self-employment tax liability. You'll probably have to make state
estimated tax payments, as well. If you don't make estimated tax payments, you
may be subject to penalties, interest, and a big tax bill at the end of the
year. If you have employees, you'll have
additional periodic tax responsibilities. You'll have to pay federal employment
taxes and report certain information. Stay on top of your responsibilities.
Step 3: Employ family members to
save taxes
Hiring a family member to work for
your business can create tax savings for you; in effect, you shift business
income to your relative. Your business can take a deduction for reasonable
compensation paid to an employee, which in turn reduces the amount of taxable
business income that flows through to you. Be aware, though, that the IRS can
question compensation paid to a family member if the amount doesn't seem
reasonable, considering the services actually performed. Also, when hiring a
family member who's a minor, be sure that your business complies with child
labor laws. As a business owner, you're
responsible for paying FICA (Social Security and Medicare) taxes on wages paid
to your employees. The payment of these taxes will be a deductible business
expense for tax purposes. However, if your business is a sole proprietorship
and you hire your child who is under age 18, the wages that you pay your child
won't be subject to FICA taxes. As is the case with wages paid to
all employees, wages paid to family members are subject to withholding of
federal income and employment taxes, as well as certain taxes in some states.
Step 4: Establish an
employer-sponsored retirement plan for tax (and nontax) reasons
Because you're self-employed, you'll
need to take care of your own retirement needs. You can do this by establishing
an employer-sponsored retirement plan, which can provide you with a number of
tax and nontax benefits. With such a plan, your business may be allowed an
immediate federal income tax deduction for funding the plan. You can also
generally place pretax dollars into a retirement account to grow tax deferred
until withdrawal. You may want to use one of the following types of retirement
plans:
- Keogh plan
- Simplified employee pension (SEP)
- SIMPLE IRA
- SIMPLE 401(k)
- Individual (or "solo") 401(k)
The type of retirement plan that
your business should establish depends on your specific circumstances. Explore
all of your options and consider the complexity of each plan. And bear in mind
that if your business has employees, you may have to provide coverage for them
as well.
Step 5: Take full advantage of all
business deductions to lower taxable income
Because deductions lower your
taxable income, you should make sure that your business is taking advantage of
any business deductions to which it is entitled. You may be able to deduct a
variety of business expenses, including rent or home office expenses, and the
costs of office equipment, furniture, supplies, and utilities. To be
deductible, business expenses must be both ordinary (common and accepted in your
trade or business) and necessary (appropriate and helpful for your trade or
business). If your expenses are incurred partly for business purposes and
partly for personal purposes, you can deduct only the business-related portion. If you're concerned about lowering
your taxable income this year, consider the following possibilities:
- Deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction
- Buy supplies for your business late this year that you would normally order early next year
- Purchase depreciable business equipment, furnishings, and vehicles this year
- Deduct the appropriate portion of business meals, travel, and entertainment expenses
- Write off any bad business debts
Self-employed taxpayers who use the
cash method of accounting have the most flexibility to maneuver at year-end.
See a tax specialist for more information.
Step 6: Understand new tax laws for
2014 and new health care provisions that will impact small business owners
which our CPA spokesperson can discuss in more detail.
Do additional research.
The California Society of CPAs (www.CALCPA.org)
has created a free Web site of articles, tools and resources to help business
owners and consumers.? These resources can be accessed by going to: “Dollars
and Sense”
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