Why The Self-Employed Pay Lower Taxes

For the most part, being self-employed has major tax advantages compared to being an employee. For example, if you use twenty five percent of your home for your office, you can deduct twenty five percent of your mortgage payment or rent as a business expense. Home office deductions also include the same percentage of your utilities, property taxes, homeowners insurance and maintenance costs. You should also include a bathroom in your calculation of the percentage of your home that is being used for business. The IRS expects that your home office will need facilities too. Office furniture, equipment and supplies are also deductible.
Tax Benefits of Being Self-Employed

Another tax advantage of being self-employed is that you can deduct all of your medical, dental and long-term care insurance premiums for you, your spouse and dependents. In comparison, if you are an employee, you can only deduct medical expenses that exceed 7.5% of your gross income.

Self employment has even more tax perks. For example, if you're self-employed you can also deduct fifty percent of your meal and entertainment expenses as long as you conduct business with the person you are entertaining. So long as you keep good records and save your receipts, you can potentially deduct 50% of your golf game, including your meal, beverages and tips. Same goes for when you take a client to a sporting event.

Being able to deduct your automobile expenses is another big benefit of being self-employed. As long as your trip is business related it's tax deductible. So when you take your next trip to Costco, remember to purchase at least one item for your business. This is another area where it's important to keep good records and save your receipts.
When it comes time to pay your taxes you can either take the standard milage rate (55.5 cents per mile in 2012) and multiply it by the number of business miles, or calculate the percentage of miles driven that were business related and use it to figure out the percentage of car expenses that are tax deductible.

One very big tax advantage of being self employed is that you can potentially defer taxes on a much greater portion of your income compared to someone that is employed. In 2013, if you're employed and are not provided an employer-sponsored retirement plan, you can avoid paying taxes on $5,500 of your income that is placed in an IRA. If you are over fifty you can put $6,500 into your IRA. Contrast this to the possibility of sheltering up to $51,000 that a self-employed individual can potentially shelter from taxes. This tax benefit gives someone who is self-employed a major leg up in decreasing their tax bill. It also enables them to pile up a much larger nest egg to spend in their retirement.

Now while we are talking about taxes, there is one disadvantage with being self-employed. When you are a regular employee, you pay 7.67% of your income in Social Security and Medicare taxes, and your employer pays the same amount. When you are self-employed however, you are responsible for the entire amount. In 2013, this amounts to 15.3 perrcent on self-employment income up to $113,700. If your net earnings exceed $113,700, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent. The Medicare tax rate increases to 3.8 percent on net earnings in excess of $200,000 if you are filing individually or $250,000 if you are filing a joint return.

There are two income tax deductions, that reduce the burden of added Social Security and Medicare taxes for the self-employed. First, your net earnings from self-employment are reduced by half of your total Social Security tax. Second, you can deduct half of your Social Security tax on your 1040 form. Therefore, if you were in the 25% federal tax bracket you'd end up with an effective self-employment tax rate of only 12.36%, not 15.3%. This amounts to you having to pay an extra 4.71% tax compared to someone that has a regular job. In most cases, all the other tax deductions more than make up for this added tax.

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