This week is Shark Week on the Discovery Channel. Last year, we told you how every week is "Shark Week" for the self-employed in Connecticut. Now, a year later, there is even more blood in the water.
The State of Connecticut has increased the number of tax rates from three to six. The new Connecticut income tax brackets are 3%, 5%, 5.5%, 6.0%, 6.5% and 6.7%. These individual income tax rates have been increased retroactively to the beginning of 2011. Additionally, the State of Connecticut has decreased the property tax credit from $500 to $300.
The self-employed in Connecticut will need to increase their estimated income tax payments on Form CT-1040ES. The next due date is September 15, 2011. Failure to make this increase in estimated income taxes will result in an underpayment penalty being assessed when the 2011 income tax return is filed. As with all other communication with the tax authorities, we recommend that all estimated tax payments are sent Certified Mail Return Receipt Requested.
Who are the Self-Employed?
- Sole Proprietors
- General Partnership with the spouse as the only other partner
- Single Member Limited Liability Corporation ("LLC")
- 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.
How to Reduce the Shark Bite
A self-employed business owner should consider:
- Funding your IRA—The maximum annual contribution is $5,000. An additional $1,000 is allowed for taxpayers over the age of 50.
- Adopting a 401(k) or SEP Retirement Plan—The maximum annual contribution is $16,500 for a 401(k) plan. For taxpayers over the age of 50 an additional $5,500 is allowed. A SEP is limited to 20% of the net income.
- Employ your child under age 18—Be cautious to follow all of the rules.
- Incorporate and Elect Subchapter S filing status
There were four "Jaws" movies. The last one produced was "Jaws: The Revenge". The State of Connecticut has just produced the fifth movie. This one is for land sharks…also known as tax collectors. What should the name of this movie be?
ACTION ITEM: Self-employed business owners in Connecticut need to be on “Shark Alert”. Take steps now to reduce the tax bite from the effects of the State of Connecticut income tax increase.
Thomas F. Scanlon, CPA, CFP®
Photo From Creative Commons