The Biggest Loser….The Self-Employed in Connecticut

The Biggest Loser is a TV show where contestants attempt to lose the most weight for cash prizes. Full Disclosure: I don’t watch the show and I have only seen short clips of it. I don’t proclaim to fully understand the show. It appears to me however the biggest loser has nothing to do with losing weight. It’s the self-employed in Connecticut. They are losing far too much to income taxes. And they certainly aren’t getting any cash prizes for it. For this discussion, the self-employed include sole proprietors, single member limited liability companies (“LLC’s) and partners in partnerships. It does not include owners of “C” Corporations or Subchapter S Corporations.

Do the Math

Here are the approximate tax rates a self-employed person in Connecticut would face in 2012: Federal Income Tax 25% Social Security Tax (up to $110,100) 15.3% Connecticut Income Tax 5% Add it up and the marginal tax bracket is over 45%. The good news for the self-employed in Connecticut is that there are states with higher tax rates!

What can a Connecticut self-employed taxpayer do?

  • Open an IRA – Taxpayers under age 50 can contribute up to $5,000. Taxpayers age 50 or older can contribute another $1,000 or up to $6,000.
  • Fund a Connecticut Higher Education Trust (“CHET”) 529 plan – A married couple filing a joint return can deduct up to $10,000 on their Connecticut income tax return for amounts funded into a CHET.
  • Hire their spouse- At the very least, the spouse may then become eligible for an IRA or, perhaps, participate in a SEP.
  • Hire their children under age 18 – Children under age 18 that work for their parents unincorporated business do not pay social security tax on their earnings. Just to be clear…the children need to actually work however.
  • Consider incorporating and making a Subchapter S Corporation – Taxpayers may want to consider becoming an employee of their corporation. A more detailed analysis would need to be done to see if this is appropriate in your particular situation.

ACTION ITEM: To avoid being The Biggest Loser, the self-employed in Connecticut need to be vigilant about their income tax planning.

Thomas F. Scanlon, CPA, CFP®

Photo from Creative Commons

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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