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William Perez

Year-End Tax Tips for Self-Employed Persons

By December 14, 2011

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Normally, tax people tout the merits of deferring income into the following year and moving expenses into this year. But 2011 may be an ideal year for self-employed people to adopt the opposite strategy, that is, to accelerate income now and wait until 2012 to incur additional expenses. What I have in mind here is the lower self-employment tax rate in 2011 (13.3% instead of the usual 15.3%) and the fact that the income base for the Social Security portion of the self-employment tax will be increasing for 2012 (from $106,800 in 2011 to $110,100 in 2012).

For self-employed persons earning less than the $106,800 max, accelerating income into 2011 saves 2% on the accelerated income compared to waiting until the tax rate reverts to normal. For self-employed persons earning over the $106,800 max, shifting income to this year not only saves the 2% from the rate reduction but shifts income out of next year when the max is higher.

There are a wide variety of other year-end tax tactics for the self-employed. Traditional year-end moves involve buying equipment and supplies this year in order to take the deduction now, setting up a solo 401(k) plan if that is advantageous for your financial situation, and reviewing whether a different business structure might be more appropriate for you next year.

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