There are two optional methods for self-employed individuals to choose from. In essence what this election does is qualify the taxpayer for up to four credits of Social Security benefit coverage for each tax year. The taxpayer would otherwise not qualify for lack of enough earned income. Let us take a look at two different approaches, one for taxpayers seeking to minimize their self-employment tax and one for those looking to maximize their total tax savings.
For example, one taxpayers’ case may indicate a need to minimize his/her self-employment tax. Some tax planning strategies to convert earned compensation income or earned income into unearned income are as follows:
- 9Pay rent to the owner at the maximum allowed.
- 9Take distributions or pass-through income from a Sub S corporation.
- 9Establish fringe benefit plans
- 9Establish qualified derred compensation plans and retirement plans
All of these strategies transform earned income to unearned income and thus are no longer subject to self-employment tax, a savings of potentially 15.3%.
1. Qualify taxpayer for social security benefits.
3. Generate a higher child care credit.
Calculation of Total Savings
Earned Income Credit: $4,590
Self Employment Tax: -$244
Payroll Taxes: -$1,800
Net Savings: $2,546
*In addition to a total savings of $2,546 both taxpayers would receive 4 eligible quarters and receive 4 credits for social security.
I hope this illustrates that self-employment tax planning is not just beneficial for high income taxpayers but all taxpayers.
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