Self-Employed? (i.e. own your own business?)

This is a good site on how to fill out your taxes if your self-employed. (Link) Pay close close attention to Step 17 in Determining expenses, the one that deals with self-employment tax. A little tax that currently amounts to 15.3% of your income. The problem is that you should be sending in your employment tax on a quarterly basis, not trying to figure out how much you owe at the end of the year. When you are self-employed, the entire burden for paying employment taxes and prepaying estimated income tax liability is left to you. That’s why you need to pay estimated taxes in quarterly installments to the U.S. Treasury; otherwise, you may be subject to underpayment penalties.

The question comes to, because SE tax is mandatory, how does one reduce it? By owning your own company, there are legal ways to incorporate or alter your business entity to reduce the SE tax owed. Contact us, if you’d like more info.

Here’s the thing when I hear individuals wanting to avoid the SE Tax: Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Caution: By not reporting all your self-employment income, you could cause your social security benefits to be lower when you retire.

So there’s a couple of issues to grapple with 1) Will Medicare and other SS benefits be there when you’re old?, and 2) Can you create your own little nest egg that you don’t need SS, i.e. can you save better than the SSI?

However much that you pay in SE tax, remember to take half of it as a deduction off of Form 1040, line 27.

Another Example of Tax Evasion: This time - Not paying employment taxes

The Edmonds-based Skipper’s seafood chain has filed for Chapter 11 bankruptcy protection — seeking to close five unprofitable restaurants, including one in Ballard, and resolve $1.9 million in unpaid employment taxes and IRS penalties.

Attributing the problems in part to efforts by the company’s finance director, Eric Li, to “cover up the accruing tax debt” through false financial reports to senior managers and owners.