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Tax Tips for
Tech Comm Contractors
By
Scott Betler, CPA
Originally published in Rough
Draft, February 2006, the
newsletter of STC's Phoenix Chapter
For
those of you who have decided to venture out on your own: congratulations. Now
that the celebrations are over, it’s back to reality. Although you have crawled
out from under the thumb of a boss, you’ve also given up that comfortable
bi-weekly paycheck to become an independent contractor. Having taken this big
step a few years ago, I offer a few words of advice on how to keep the clutches
of the tax man from grabbing too much of your earnings. I’ll give it to you
straight: no weasel words here.
First, the bad
news: self-employment (SE) taxes. In addition to the federal and state income
taxes, you must pay an additional 15.3 percent tax that represents both the
employer share and the employee share of Social Security and Medicare
taxes. Remember, you’re wearing both of those hats now. This tax is calculated
on the net profits from your self-employment. So to minimize the tax, you could
maximize your expenses. Well, not exactly. Unfortunately, deductions such as
retirement contributions and health insurance, while deductible for income tax
purposes, are not deductible for self-employment tax purposes.
A way around some
of this may be to incorporate. Then, at least, your health insurance (and
possibly other health care costs) could be deductible. Also the employer
contribution to your retirement savings could be deductible. But there are a
number of costs and inconveniences needed to accomplish this, and you must weigh
whether those costs are worth the tax savings you might realize. Some of the
costs include:
- The incorporation process
- Annual corporation commission
filing
- Annual federal and state income
tax returns
- Quarterly payroll tax returns
- Annual pension plan returns
- Annual employee benefit plan
returns
- High corporate income tax rates
for personal service corporations
If you already have
some employees and you are making big bucks, looking into incorporating may be
worthwhile. For the rest of us, the costs associated with incorporation
probably are not worth whatever tax savings we might realize. So what to do?
Maximize your retirement contribution anyway.
This may not save you SE tax, but it will help you save some federal and state
income taxes, and “forces” you to save as much as you can toward your
retirement. That is a good thing.
Keep track of your mileage.
The most recent Federal rate for business mileage is 48.5 cents per mile.
If you travel you can use the Federal per diem rates for meals
and incidentals.
Save your lodging receipts, self-employed people cannot use per diem rates for
lodging, you must go with what you actually paid.
Buy the equipment that you need. Need
a new computer? Buy it. When using a Section 179 deduction you don’t always have
to depreciate asset purchases over a number of years, and you can expense those
items in the year of purchase up to $100,000 or your net profit (whichever is
less).
If you work out of your home, take advantage of the
office-in-home deduction.
Based on the ratio of your office space to the total square feet of your
home, you can take a percentage of your utilities, insurance, mortgage interest,
real estate taxes, home maintenance and repairs, and depreciation on your home.
And most of all:
Keep track of all of the other expenses related to your
business. Your tax preparer may be able to consider other tax
strategies you had not considered. Keep track all year, not simply at the last
minute when you have to get that shoebox together before you visit your
accountant.
Congratulations
again on your big venture. Remember to keep good records and to be as organized
as possible: we CPAs charge by the hour, and that includes weeding through the
contents of those shoeboxes.
Scott Betler is a Certified Public Accountant
licensed in Arizona and Maryland and a principal in the firm of Betler & Flynn
CPAs, PLLC, with offices in Sedona and Phoenix.
Questions? You can call Scott at
(928) 284-2779.
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