Many self-employed taxpayers may be looking for strategies that could help jumpstart future tax years. Here are a few strategies that self-employed taxpayers can take advantage of to help minimize their tax burden.
SEP IRA is a great way for the self-employed to be able to provide a retirement option to their employees and allow for a significant tax benefit. The SEP IRA is a great alternative to small business owners compared to a 401(k). The SEP IRA allows small businesses to contribute up to 25% of the employee’s gross earnings up to an annual maximum per employee of $56,000 for 2019.
A SEP IRA also allows for retirement contributions to the owner of a business, in that they can contribute up to 25% of self-employment income. This number is then reduced for self-employment taxes, which equates to approximately a 20% net contribution. This can be a significant tax deduction for a self-employed taxpayer to help minimize taxes.
Bonus Depreciation & Section 179
Another option to help minimize your tax burden includes the continued provision to accelerate depreciation for any new equipment or other property purchased. The 100% bonus depreciation provision remains intact and allows the taxpayer to fully depreciate the purchase of an asset, which can include both purchase of new or used assets. Section 179 is another provision that allows for expensing the full cost of any assets purchased. The deduction limit for 179 is $1,000,000 with a maximum purchase threshold limit of $2,500,000.
Reviewing Entity Structure
Reviewing your entity structure is always a good tax planning exercise. If you are self-employed and haven’t taken the steps to review your legal structure, now would be the time to make the review a reality. Incorporating your business can provide increased legal protection but also can provide different tax benefits based on the entity of choice. LLC, S-corporation, and C-corporation structures each provide their own pros and cons when it comes to taxes, and you will want to review with your accountant and attorney to decipher which provides the best results for you.
Review/Update Your Withholdings or Estimated Taxes
Being self-employed also means that you are responsible for paying your taxes on the income you earn throughout the year to avoid any underpayment penalty. This can be in the form of estimate tax payments or withholding on wages you pay yourself. The withholding on wages would come into play if you were a corporation. In order to minimize any underpayment penalties, you will want to ensure you have enough estimated taxes or withholding paid into the IRS. The safest way to prevent an underpayment penalty is to pay in 100% (or 110% if your adjusted gross income was over $150,000 or $75,000 if married filing separately) of your prior-year tax over a quarterly basis.