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what are the tax implications and benefits of self-employment
The common thinking about working for yourself is, you will pay more tax. The reason being that you will cover the employer portion of the Social Security and Medicare taxes.
While you will definitely pay for these two type of taxes, the tax advantages for self-employment will offset these taxes.
1. As a self-employed person, you are effectively a business for tax purposes. This means you will need to file Schedule C to compute your biz's profit/loss with your tax return. If you made a profit on Schedule C, it is taxable. But if you have a loss, you could use the it to offset other income for this year's return. If you still have a loss, you can offset income in previous or future years' tax returns. You will also need to compute your estimated taxes and file them quarterly.
2. For self-employment retirement, you could setup a SEP-IRA. You can contribute to the account to reduce taxable income. You can also invest up to 20% of net income to this plan.
3. As you are self-employed, there are a lot of business related deductions and expenses you could utilize. 50% of self-employment taxes are deductible. Health insurance premiums deductible too. You can also write off business expenses for supplies, conferences, business lunches etc. Under a special small biz tax break rule, you can also deduct up to 250k worth of equipment, such as computers.
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Jian, Last Updated: 2010-01-23 22:58
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