Tax Strategies for the Self-employed

Paying taxes can never be totally avoided. However, it is your right to minimize your taxes within the law and there are many ways to accomplish this, especially if you are a business owner. The self employed bristle at the amount of taxes they pay to the federal and state governments each year.

Think of the taxes you pay every year, there are Federal and State income taxes, there is social security and Medicare, there is property tax, sales tax, tolls and fees which are also taxes. By the time you are done paying taxes you have likely paid well over 50% of your hard earned money in taxes. Many people just don't realize how much they actually pay in taxes and most people don't realize how much they could reduce their taxes with a little planning and forethought.

If you are self employed or a business owner you can use the tax laws to significantly reduce your taxes by planning to take advantage of all available write offs and deductions. As complicated as they are the full scope of tax credits and deductions available in the tax code are available to you as a business owner. The key however, is to gain an understanding of the tax laws and then to organize your business so that you can maximize the write-offs.

It is important to understand right from the start that one of the keys to successful tax planning is to keep good organized records and to document every business transaction. Documentation is the key to supporting your tax write offs and deductions. Almost anything can be deducted, acceptable expenses include: cell phone; business mileage, office supplies, home office deductions including part of mortgage or rent, a car or truck used in the business, etc..

You should maximize you non-capital losses, this can result in major tax savings. If you have expenses that exceed your income for a year, you will owe no taxes for that year, including social security and medicare. Also these losses can be carried forward for seven years and deducted against future income and carried back three years to recover past taxes paid. The end result is you can turn a bad business year into an income producer by applying the losses to taxes in other years which may wipe out or significantly reduce your tax bill for those years.

As a business owner having the right legal structure for your business is of utmost importance. The Limited Liability Corporation or LLC has become very popular in recent years. Limited liability companies offer a unique combination of corporate liability protection and partnership pass-through taxation. Limited liability company "members" don't have to limit their participation in the firm's management to protect their personal assets from the firm's creditors, like in a limited partnership, but still qualify for partnership taxation treatment. Also there are no limits on the number or kind of shareholder like in an S corporation, giving LLCs greater access to capital. They're not restricted to a single class of stock as S corporations are, so LLC members have a greater ability to allocate gains, losses, deductions, and credits. LLCs have a lot more estate planning flexibility than S corporations, too and there are other technical advantages that can make a bottom-line tax difference. Whether your business should be an LLC or not will depend on your particular set of facts and circumstances. Most start-up ventures should consider operating as an LLC and existing proprietorships should consider converting, to protect the owner's personal assets from any financial problems that develop in the business.

Aside from the corporate entity you have the ability to save for retirement with tax deferred dollars or using the Roth IRA tax free earnings. If you have business travel you can mix pleasure with business and write off the whole trip. You can have your children work for the business, this could be money coming into your household that is not part of your income and could be tax free yet be used to support your children.

There are many ways to legally reduce your tax burden with a little planning and for thought, just make sure you keep good records and have complete documentation of all business transactions and above all stay within the law. Consider hiring a professional, a good tax pro can save you thousands of dollars over and above the fees.