When you are self-employed, you have several tax advantages over employees. Take advantage of these opportunities. The following chart lists some of the tax advantages of being self-employed.
| EMPLOYEE | SELF-EMPLOYED | |
|---|---|---|
| Business expenses | Employee business expenses are miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) limitation. | Self-employment expenses are deductible directly against your business income. |
| FICA tax/Self-employment tax | Employee business expenses are not deductible in determining the amount of FICA tax your employer collects from you. | Self-employment expenses reduce your income, and thus reduce your self-employment tax. |
| Calculation of expense items based on your adjusted gross income (AGI) | Employee business expenses are not deductible in determining your AGI. | Self-employment expenses reduce your AGI, which has a favorable effect on the calculation of your medical deductions, reduction of your itemized deductions, eligibility for Roth and deductible IRAs, and other calculations based on your AGI. |
| Retirement plans | Eligible for employer-provided plans and IRAs | Eligible to start Solo 401(k), Keogh, SEP, or SIMPLE plans and also eligible for IRAs |
| Alternative minimum tax treatment | Employee business expenses are not deductible for alternative minimum tax — they are a tax preference item. | Self-employment expenses are deductible for alternative minimum tax. |
However, there are some disadvantages of being self-employed. Some of these disadvantages are:
- Self-employment tax, although you are able to deduct half of your self-employment tax
- Estimated tax payments
- Preparation of Schedule C and possibly other business tax forms
- Increased likelihood of Internal Revenue Service audit
Julie Welch (Runtz), CPA, CFP, and Randy Gardner, LLM, CPA, CFP, are the authors of 101 Tax-Saving Ideas, 9th edition, published by Wealth Builders Press. To order ($27.95), call 816-561-1400, fax 816-561-6296 or email
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