Don't just look at last-minute write-offs when considering self-employment tax deductions. Think about laying down some long-term strategies for money savings from year to year – particularly if you are a high earner.
“Accountants typically tell you what you have to pay,” said Stephen K. Davis, chief investment adviser for Safe Harbor Asset Management in Huntington, New York. “They don’t always tell you strategies to reduce your payments.”
To reduce your gross taxable income, consider setting up a defined-benefit pension plan, Davis said. This plan is based on your age and income: The older you are and the higher your earnings, the more you are allowed to contribute. An alternative plan is an age-weighted profit-sharing plan, which is similar and can benefit those who have several employees.
Another strategy for high-earning business owners who own their own building through a limited liability company or similar business structure is to pay themselves rent, said Davis. This rent is used to pay down the mortgage, but it is also considered a business expense for tax purposes.
Self-employed professionals required to have liability insurance should consider setting up their own insurance company. A captive insurance company is one that insures the risks of the business – or businesses, in the case of a cooperative. Its premiums can be tax-deductible.
But, Davis warned, if money accumulates and claims are minimal, the money taken out is taxable under capital gains. Davis emphasized that this is not a retirement strategy, but that it can save you money by allowing you to “pay yourself” instead of an insurance company and still deduct the premiums.
With any of these more complicated, long-term strategies, consult with a business attorney or financial planner to ensure you have the best plan possible for your business.