How to slash tax liability for independent consultants
Independent consultants are doing their business on their own and ironically, they are loaded with increased tax burden of owning a business. Still we are lucky enough to have strategies to help reduce this tax burden.
The major contributor of this tax burden is the self-employment tax. Every employer is responsible for paying his portion of social security and Medicare tax for his employees. In the same way as you are self-employed, you are supposed to pay both the portions of employer and employee for these taxes. Currently these taxes sum up to a whopping 15.3% of your earnings.
There are several legal structures designed but you have to opt for the one that suits your business the most. By choosing some structures, you may opt for paying self-employment tax and alternatively, with some other structures, you can choose to go for double taxation. This double taxation means that the corporate entity is taxed on its earnings separately and then again a separate tax is to be paid on the salary paid to employees, including your own salary. This is taxed as the personal tax return. So, needless to say, it is very crucial to choose the correct business structure and it is definitely suggested to take a professional advice on this matter.
If you choose to work with an employer of record, it can help you reduce your taxes. A portable employer of record provides a corporate infrastructure to an independent consultant. This way the consultant is free from the hassle of setting up a formal business entity and can save his employment tax as well. If you work with a portable W-2 employer of record, you will be paying only the employer’s side’s taxes but by choosing this particular business structure your tax liability for retirement contributions and other benefit programs is considerably lowered. To reduce your taxable income you have to maximize your itemized deductions. For this, you have to take credit for each and every deduction that you are eligible for and can save on your taxes. This can be small out-of-pocket medical expenses along with the medical premiums or procedures and tests, not covered by insurance.
However, there are certain conditions to be fulfilled to avail deductions for these out-of-pocket expenses. As you are running your own business as a sole proprietor, LLC or S Corp, to be eligible for these deductions your out-of-pocket expenses should be equal to or greater than 7.5% of your adjusted gross income. For example, if you are a consultant whose earnings are $80,000, then the deductions would have this limit of $6,000 and can be easily achieved. But when a consultant is earning $200,000 a year, to fulfill the criteria of eligibility, he has to have the limit of $15,000 for his out-of-pocket medical expenses.
This eligibility for deduction is not required to be considered if you are working with an employer of record. Then you can deduct all your out-of-pocket medical expenses up to a given limit without qualifying to meet the eligibility limit. Here you need to study the strategies of the employer of record properly as all of them are not following the same strategies and you have to select the best to suit your need to reduce your taxable income.
You can also avail of the deduction for the expenses paid on dependent care as child and/or elder care. These deductions normally have a limit of $5,000 per year. You need to check with your employer of record organization if they have any expense reimbursement program to offer. As in such cases this limit can be increased even up to $10,000 per year. You would be aware of the childcare costs deductions but you should also remember to deduct the elder care expenses. Your per year expenses can easily add up to $5,000 to $10,000 if you have your parent in nursing home or even a daycare setting or if he has assisted living facility, which means you have some scope to further reduce your tax liability.
Lastly, remember to take miscellaneous deductions for heads such as educational expenses, professional books and trade magazines, home office expenses, travel, lodging and even 50% of business meals. But remember some of these are deductible if you exceed 2% of your adjusted gross income. For this you have to maintain a proper record of all your deductions and the same can be eased with the help of an accountant. Again check out if your employer of record is offering a simplified process of keeping track of your business deduction and thus taking business deductions to reduce your tax liability. So make sure you explore this option of business deductions thoroughly to help you reduce your tax liability.
(ArticlesBase SC #1470980)
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tax strategies for independent consultants
,business deductions and credits for independent consultants
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