Why Every Week is "Shark Week" for the Self-Employed in Connecticut

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®