self employment and taxes - what do you do?

Posted on: 28 July 2015

As you grow your small business and your profits increase, so will your tax liabilities. If you aren't experienced in dealing with business taxes in general, you may not understand the various avenues available to you as an entrepreneur to capitalize on those profits while still minimizing your tax bill at the end of the tax cycle. Working with a CPA is often the best way to identify savings opportunities, but there are some tried-and-true options to consider. Here are a couple of ways you can make the most of your company's earnings while moderating the tax liability that comes with it.

Make the Most of the Personal Contribution Deductions

Especially in sole proprietorships, you probably use both your home office and your personal vehicle for business purposes. Since a sole proprietorship often is filed on your personal taxes, that opens up some unique opportunities to take tax deductions for this use. Over the year, that deduction can add up just by doing the things you normally do anyway.

In the case of the home office, you're able to write off the cost of the space if you're using it for work. You'll need to know the square footage of the office and the total square footage of the home. Then you can calculate the percentage of your home's square footage that is the office. For example, if your home is 1,450 square feet and you have an office that is 400 square feet, the office is approximately 27 percent of your home's square footage. That means you may be able to deduct 27 percent of your utilities and mortgage as business expenses.

If you're using your car for business purposes, keep track of your mileage associated with those business trips. You can deduct a specific amount per mile for business travel. The goal of the deduction is to offset the wear and tear on the car, the fuel costs and the insurance. The IRS determines the deduction rate and publishes it every year.

Work with Family

As a sole proprietor, hiring your immediate family members is a great way to help you manage the business tax liabilities. When you pay family members to work for you, that increases your household income, and it reduces the company's taxable income. This can be particularly beneficial in cases where you hire your spouse to work for you.

Just keep in mind that you can't hire your family and pay them unless they are actually working at the business. And, you have to pay them a fair rate that's equivalent to the current market for the position they hold. You couldn't pay your daughter $80,000 per year to work as a cashier, for example.

With these suggestions and the support of a professional CPA, like William M. Kaneski, CPA, who can help you understand exactly how to use them, you may be able to reduce your tax liability without negatively affecting your business operations.