Discussion:How to minimize SE Tax?

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Discussion Forum Index --> Tax Questions --> How to minimize SE Tax?

Inagpurwala (talk|edits) said:

10 April 2006
I know same question was asked by someone before. I cannot find it or the answer.
  • Client is Sole Proprietor. Sch C net income $70,000
  • Oops -- Client forgot to make estimated Fed and SE tax payments.

Question: Any way to minimize SE tax now ?

Of course for tax year 2006, first payment is already in the mail. Any help appreciated.

Natalie (talk|edits) said:

10 April 2006
Any forgotten deductions? If on cash basis, can deduct credit card charges made through 12/31/05. If on accrual, were all expenses considered, even if invoice not received? There are options with retirement plans to help lower income tax (won't help SE tax issue, however).

Rina Tringali (talk|edits) said:

17 April 2006
Assume the 2005 return is on extension? Can taxpayer make a SEP contribution? Have until the tax return is filed to do so. Won't reduce SE tax, but will reduce regular taxes.

JR1 (talk|edits) said:

17 April 2006
Depending on what this client does for a living and therefore a reasonable salary, consider getting him/her inc'd right now and into an S to cut that payroll tax.

Natalie (talk|edits) said:

18 April 2006
The decision to incorporate or not can be a tricky one, and whether one can actually save $ on payroll taxes really depends on the situation. There's the unemployment tax (usually federal and state), TDI, and possibly workers compensation that need to be paid. There's an additional income tax return that needs to be filed as well the administrative costs of payroll paperwork. Granted, there is some "play" with the salary/distribution issue, but that is being looked at by the IRS and may not offset the additional costs. There are also other tax consequences that need to be considered: Does SH have children that will work for the business? (Better treatment when hired as sole prop.) Is income low enough that EIC is an issue? (Again better treatment as sole prop. due to health insurance reporting requirements.) And then there's the whole issue about the home office deduction.

There may be other issues involved as well. For example, in Hawaii there are more options for health insurance if a person is incorporated.

Inagpurwala (talk|edits) said:

18 April 2006
Thanks Natalie:

I thought about advising for "S", but as you mentioned, will not help much and will increase payroll cost. Client is (was for this filing season) married with two chlidren. Spouse is on W2 with another firm and covered for Health Insurance.

I have advised client to hire the yougest daughter (she 16 this year - 2006). This will reduce some income but not whole lot. Home Office deduction cannot be taken because the lack of "exclusive use" requirement. Cell Phone expense not much and used for both personal and business. Hence I advise not to claim it at all to avoid "red flag" for audit.

Thanks again.Inagpurwala 14:46, 18 April 2006 (CDT)

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