Nonprofit organizations are required to file an information return annually.  See our recent post for the details on this.

Nonprofit organizations that don’t meet their filing requirements for three consecutive years automatically lose their tax-exempt status. more…

Ever go looking for a copy of an old tax return and can't find it?  This happens frequently.  How? more…

The first half of the year is in the books.  It's time to take a look at your withholding and estimated tax payments.  Why is this important?  To avoid any potential penalty for underpayment of estimated taxes.  more…

This is "Shark Week" on the Discovery Channel.  We are (not so gently) reminded not to swim with the sharks.

For the self-employed in Connecticut, every week is "Shark Week".  A self-employed person is someone who runs their business as one of the following entities:

• Sole Proprietor
• General partnership with the spouse as the only other partner
• Single Member Limited Liability Corporation ("LLC")
• An LLC where the spouse is the only other member

For this discussion, we are not including business owners that have either a corporation or have elected Subchapter S filing status.

The self-employed in Connecticut have to deal with a much more difficult shark than the ones in the ocean.  They have to deal with land sharks, also known as the tax collectors that want a piece of you. 

For example, a self-employed person lives in Connecticut with his wife and two children.  He makes $100,000 a year.  They do not itemize their deductions and to keep the example straight-forward, we are ignoring any possible tax credits they may be entitled to.  Here is the income tax they will pay based on the 2009 tax tables:

• Federal Income Tax (The Great White) ― $9,204
• Social Security Tax (The Hammer Head) ― 15.3% social security tax on their net income of $100,000 would be $14,130 (the calculation is slightly different).  They are allowed to deduct one-half of this tax in calculating their federal income tax.
• State of Connecticut Income Tax (Jaws) ― $3,822

Let's add these up…federal income tax of $9,204, social security tax of $14,130, and Connecticut income tax of $3,822.  Total taxes are $27,156.  That's a big shark bite!

What can a self-employed business owner do to minimize this?

• Fund your IRA – this is a great tax-deferral tool to provide for your retirement.
• Look at a 401(k) plan or SEP – these qualified retirement plans may allow you to contribute more to your retirement.
• Hire your children under age 18 – if you are eligible, this is a great way to hire your children and save taxes.

   

ACTION ITEM:  The self-employed business owner needs to be aware of the tax planning techniques available to reduce their tax bite.

Thomas F. Scanlon, CPA, CFP®
 

Most taxpayers should not represent themselves in an IRS audit.  Most taxpayers should have their CPA or tax preparer represent them.  If they hire their CPA, they should not accompany them to the audit.  Why?  They might be tempted to answer unasked questions. more…