3 Tips to Reduce Self-Employment Tax

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: Of the two deduction schedules A & C, the former shows income tax reduction and the latter shows income tax reduction and SE tax. Rumors are afloat about showing the home office deduction. A few are of the opinion that the very mention of home office deduction will attract scrutiny which is untrue; the very action of excluding the office deduction will surely warrant coughing up heavy tax amount. It is also the general belief that projecting mortgage interest and property tax on Schedule A or the projection of office deduction on Schedule C will invite same amount of tax. This is again untrue.

2. Tax preparation fees deduction: Tax preparation fees may be indicated on Schedule C and then income tax as also self-employment tax may be deducted thereon. Benefit earned will not be substantial in case tax preparation fees is indicated on Schedule A. Hence, you must always look to reduce your tax bill.

In Schedule A the deductions are subject to 2% limit which means that the tax payee has to adjust his miscellaneous deductions to a amount equivalent to 2% of the Adjusted Gross Income. So any number of deductions you mention under "Certain Miscellaneous Deductions" there is a defined limit, which is a drawback of this schedule.

There are some limitations in Schedule C also like the only Tax preparation fees you can mention is the fees you pay to your accountant for the business work he does. The accountant fees has to be divided into business forms (like Schedule C, Schedule SE, Form 8829 and Form 4562) and non-business forms (like Form 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. The software program for Tax Preparation: Before filing Schedule C, the calculations have to be completed. Actually the tax is not 15.3% as it appears. Firstly, the tax is paid only on 92.35% of the profit and not paid fully, secondly get a 50% tax deduction on SE Tax by filling the form 1040. Also do not forget to include the calculations on social security and Medicare portions of the SE Tax. To get the calculations done in an easy way, by spending few dollars, it is good to purchase a software program.