You Can Reduce Self-Employment Tax... Here's How!

It is easy to see why a self-employed individual would see the self-employment (SE) tax as unfair. While in an organization, that same employee would have to pay taxes amounting to roughly 7.65 percent. However, as a self-employed individual, those same federal taxes run approximately 15.3 percent. One of the ways to mitigate this tax is to fill out Schedule C. The following points demonstrate the good and bad qualities of Schedule C, something every self-employed individual should be aware of.

1.Home office deduction : Schedule A deduction reduces income tax where as Schedule C deduction reduces income tax as well as SE tax. There are some rumors on showing the home office deduction. Some believe that mentioning the home office deduction will invite an audit which is not true; not including the deduction will definitely result into high tax payment. People also believe that they have to pay the same amount of tax if you show mortgage interest and property tax on Schedule A or if you show home office deduction on Schedule C, which is not true.

2. Tax preparation fees deduction: Mention the tax preparation fees on Schedule C and reduce both income tax and SE tax. One can also show the tax preparation fees on Schedule A but there will be less benefit. So always prefer to reduce your taxes.

The taxpayer can use Schedule A to calculate and adjust his/her miscellaneous deductions to 2% of Adjusted Gross Income. Therefore any deductions listed under "Certain Miscellaneous Deductions" are limited which represents a negative as far as the usability of this schedule.

It is important to remember that only business related expenses should be entered on your Schedule C Tax Form. An example would be the fees you pay your account for business related items. Accounting fees should be segregated into either business or non-business classes. Business items would be included on such forms as: Schedule C, Schedule SE, and Forms 8829 and 4562. Non- business items would be included on forms such as 1040, and Schedule A.

Do not neglect to include such work as paycheck processing, software consultation, keeping books, or the payroll tax returns that were done by an accountant.

3. Tax Preparation Software: Use tax preparation software especially if you are self-employed and are filing Schedule C. It will help you wade through the complexities of reporting your own business. Self-employment brings its own share of tax frustration, especially in the areas of Self-Employment Tax, Social Security tax, and Medicare reporting. For your business, you will find you pay tax on about 93% of the profit you make. On Schedule C you can also declare expenses of your business, which will help from year to year. The money you spend on Tax Preparation Software will be worth it in the long run.

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.

Learn how to claim tax deductions for mileage and other small business tax deductions that can save you tons of money. Ron Finkelstein is NOT a Tax Attorney or an accountant. He is merely a small business owner who has paid a lot of money over the years to learn a whole lot about Taxes and Time Management. I hope you enjoyed learning these tax tips for the self-employed

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