Keeping track of your earnings and expenditures may be difficult if you are an independent contractor or freelancer. It is critical to file your taxes to avoid any associated penalties accurately. Legislators have written numerous provisions into the tax code over time to ease the burden of added costs incurred by self-employed taxpayers while conducting business.
As an employer, your business is responsible for reporting income to the government, withholding federal taxes from paychecks, and filing state tax returns. Although payments are split between team members and employers, both parties have shared interests in avoiding mistakes. It is best if somebody else does your accounting. A reliable accounting firm can help you prepare your taxes as well as any tax filing.
Did you know that there are some situations where it could be beneficial for you to pay taxes through the business entity? Here are six advantages of paying taxes as a business instead of a freelancer.
- You can take advantage of business deductions that may not be available to you as an individual taxpayer.
- You may be able to lower your self-employment taxes by paying yourself through your business entity.
- Avoid Social Security and Medicare taxes if you are an independent contractor.
- Business owners may have access to possible tax credits and deductions not available to employees.
- The passive activity loss rules may be more favorable for your business entity.
- You may receive tax-favored fringe benefits from your business entity.
You can take advantage of business deductions that may not be available to you as an individual taxpayer.
In general, the total amount of deductible expenses for a small business is limited to your business income. However, there are some deductions referred to as “below-the-line,” which you can claim whether or not you have any business income. Below-the-line beliefs are deducted from the individual’s tax return, even though they may come from a business. Things like alimony payments, moving expenses, and student loan interest are just some of the deductions that an independent contractor would want to take advantage of if they could file taxes as a business instead of an individual.
You may be able to lower your self-employment taxes by paying yourself through your business entity.
If you are still employed full-time, you will have to pay both Social Security and Medicare taxes on your employment income. However, if you are working as an independent contractor, you have to pay these taxes on your net income based on the percentage of your labor. For example, if your net income reported on Schedule C is $40,000, you will have to pay 9.5% in Social Security and Medicare taxes (which amounts to $3,803). Instead of working as an individual freelancer, you were working through your corporation or LLC, which pays you a salary for services performed instead.
Avoid Social Security and Medicare taxes if you are an independent contractor.
Self-employed taxpayers can avoid paying Social Security and Medicare taxes by filing as a sole proprietor or through their business entity. If you are over age 59½, you can avoid paying Social Security tax on up to $35,350 of self-employment income in 2019. However, the limit is only $200 for any individual or entity that you might be doing business with.
Business owners may have access to possible tax credits and deductions not available to employees.
Real estate tax credits for small businesses and clean-burning motor vehicle deductions are just some of the possible business tax credits that an individual may not qualify for as a regular employee. Still, they might be available to them as a business owner.
For example, a business owner can separate business income from labor by setting up different bank accounts or filing as a sole proprietor, or operating as an LLC where the individual draws a salary as an employee.
The passive activity loss rules may be more favorable for your business entity.
You may be able to claim losses from real estate or investments held by an S corporation or limited liability company (LLC) even if you are not actively involved in the day-to-day management of that enterprise. It could benefit an individual who has investments or activities (such as real estate rentals) that they would like to claim as a loss but cannot do so since they were not actively involved. These activities are passive, resulting in the disallowance of losses unless you own at least 50 percent of the business.
You may receive tax-favored fringe benefits from your business entity.
In general, self-employed taxpayers cannot deduct the cost of their health insurance premiums as a business expense – but the corporation or LLC they own may be able to do so if they pay for it. The same can be said about retirement plans and health savings accounts that you might have through your corporation or LLC.
If you still work full-time for your business, you can take advantage of certain deductions not available to freelancers. If you are over the age of 59½, you can avoid paying Social Security tax on up to $35,350 of self-employment income by filing as a sole proprietor or through your business entity. Business owners may have access to possible tax credits and deductions not available to employees. Business owners may pay less in self-employment taxes by filing as a business instead of an individual taxpayer.
