Strategies for reducing the increasing self-employment tax
The self-employment tax can be an enormous tax burden on a self-employed business owner. It can often be more than the income tax for a self-employed individual.
The self-employment tax is how the IRS collects Social Security and Medicare taxes on self-employed individuals. The Social Security tax rate is 12.4 percent of the business profit until the ceiling has been reached. For example, the Social Security tax on $100,000 profit would be $12,400.
In 2022 self-employment tax limit is $147,000. Any profit which exceeds the limit would not be subject to self-employment tax.
The Social Security Administration issued its latest projected ceilings for the next five years. The projected ceiling in 2023 is $156,000 and will increase to $180,600 in 2027.
Fortunately, strategies can reduce the amount of Social Security tax paid by a self-employed business owner.
Tax strategies can reduce the amount of business profit, reducing the self-employment tax and income tax.
Some of my favorite tax strategies for self-employed business owners include:
- Hiring your spouse
- Renting from your spouse
- Hiring your children
- Two-car strategy
- Forming an S corporation
Hiring your spouse can provide a substantial amount of money when done correctly. You would receive no tax savings from paying your spouse with cash wages. Doing this would essentially be moving income from one place on your tax return to another. You must pay your spouse with as many tax-free employee benefits as possible to reduce your taxes.
Employee benefits are tax deductible for the business owner but not taxable for your spouse-employee. These benefits include health insurance, life insurance, medical reimbursements for doctor bills and prescriptions, tickets to sporting events and concerts, small gifts, and flowers and fruit trays for special occasions.
Renting from your spouse reduces your self-employment tax since rental income is not subject to self-employment tax.
The two-car strategy can save thousands of dollars a year without driving any additional miles. This strategy involves taking the mileage deduction on the primary vehicle and taking the actual expense on the secondary vehicle.
Hiring your child has many benefits, including tax savings. Generally, if you hire an employee, you are required to take Social Security and Medicare tax out of their wages paid, and the employer must match those taxes. You and your kids pay no payroll tax when your kids are under 18. The standard deduction in 2022 is $12,950. They would pay no income taxes if their earnings weren’t more than their standard deduction.
Another strategy is changing your business to an S corporation. You would be required to pay payroll taxes on your salary, but an S corporation’s profit is not subject to payroll tax.
Tax saving strategies can provide a substantial amount of tax savings and provide other valuable benefits.
The strategies in this article are included in my latest book, CRUSH THE IRS, 50 Incredible Tax Saving Business Strategies. I’m offering a free copy to the first readers 25 readers who contact me.
David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at david@yourtaxcare.com.