MONEY MATTERS: Self employment brings freedom, responsibilities

By Koele Godfrey Ivestments

Self-employment is the opportunity to be your own boss, to come and go as you please, and oh yes, to establish a lifelong bond with your accountant.
If you're self-employed, you'll need to pay your own FICA taxes and take charge of your own retirement plan, among other things.
Here are some planning tips.

Employ family members to save taxes
Hiring a family member to work for your business can create tax savings for you because, in effect, you shift business income to your relative.
Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn't seem reasonable, considering the services actually performed.
Also, when hiring a family member who's a minor, be sure that your business complies with child labor laws.
As a business owner, you're responsible for paying FICA (Social Security and Medicare) taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won't be subject to FICA taxes.
As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as certain taxes in some states.

Establish an employer-sponsored retirement
plan for tax (and non-tax) reasons

Because you're self-employed, you'll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan, which can provide you with a number of tax and non-tax benefits. With such a plan, your business may be allowed an immediate federal income tax deduction for funding the plan.
You can also generally place pretax dollars into a retirement account to grow tax deferred until withdrawal. You may want to use one of the following types of retirement plans:
Keogh plan, Simplified employee pension (SEP) SIMPLE IRA, SIMPLE 401(k), Individual (or “solo”) 401(k).
The type of retirement plan your business should establish depends on your specific circumstances. Explore all of your options and consider the complexity of each plan. And bear in mind that if your business has employees, you may have to provide coverage for them as well.

Take full advantage of all business deductions to lower taxable income

Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled.
You may be able to deduct a variety of business expenses, including rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. To be deductible, business expenses must be both ordinary (common and accepted in your trade or business) and necessary (appropriate and helpful for your trade or business).
If your expenses are incurred partly for business purposes and partly for personal purposes, you can deduct only the business-related portion.
If you're concerned about lowering your taxable income this year, consider the following possibilities:
• Deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction.
• Buy supplies for your business late this year that you would normally order early next year.
• Purchase depreciable business equipment, furnishings and vehicles this year.
• Deduct the appropriate portion of business meals, travel and entertainment expenses.
• Write off any bad business debts.

Self-employed taxpayers who use the cash method of accounting have the most flexibility to maneuver at the end of the year.
For future editions we want to hear from you. Please e-mail or call us with your questions or comments: Koele Godfrey Investment Group, KoeleGodfrey@lpl.com )616) 931-1223, toll free (866) 512-7164. We are located at 123 E Main Ave, Zeeland. Visit our Web site at www.KoeleGodfrey.com for more information.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Please contact a qualified tax advisor for tax advice particular to your situation. Securities and Financial Planning offered through LPL Financial, Member FINRA/SIPC.