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Tax tips for the self-employed
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November 20, 2001: 11:13 a.m. ET
Hire your kids and expense new equipment to keep the IRS at bay.
By Annelena Lobb
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NEW YORK (CNN/Money) - If you're a small business owner, chances are you enjoy the perks that come with the job: setting your own hours; being your own boss.
But you may also feel you get the short end of the stick every April 15th. That's because the self-employed get stuck paying both the employer and employee share of Social Security. Depending on your income, you may also pay more in Medicare.
The good news is there are a number of ways to offset those expenses using tax deductions and write-offs. You just have to know where to look.
The following list includes a snapshot of the simplest ways to cut your tax bill down to size. Just remember, to claim them on your 2001 return, you'll need to take advantage of them by Dec. 31.
1.) Employ your dependent children.
Tax professionals say you can reduce your taxable income by employing your children who are under 18. Rather than giving your kids a weekly allowance for household chores, put them to work for you and deduct the dollars you pay them from your taxable income. Kids under 18, who can file papers, update computer records, and send out invoices, are allowed to earn up to $4,550 a year in income before they have to file an income tax return.
"If you pay him even $20 a week, you'll shift $1,040 over the course of a year in income from your salary over to your child," said Frank Degen, an enrolled agent in Setauket, N.Y.
Note: This strategy works only if you have an unincorporated business. If you have a corporation, you'll have to pay Social Security taxes on the wages you pay your child. And, of course, it has to be bona fide work - you can't put a four-year-old on the books.
2.) Hire your spouse and pay for health care.
If you hire your spouse and provide him or her 100 percent health benefits, you can deduct the entire cost of paying those benefits on Schedule C.
"[Your spouse] can then name you for the spousal benefit, and bingo - you've both got health care," said enrolled agent David Bergmann, of the David R. Bergmann Group for Tax, Insurance and Financial Services in Marina Del Rey, Calif.
One medical plan option for the self-employed includes medical savings accounts, or MSAs. These tax-friendly accounts, when used together with a high-deductible insurance policy, allow you to use pre-tax dollars to fund the account and the money is used to pick up the tab on prescriptions and procedures your primary insurance company doesn't cover. MSAs are open to small businesses with 50 or fewer employees and any unused money at the end of the year stays in the account accruing interest.
3.) Make your home your office.
If you run your office exclusively and regularly from your home - that is, you perform all the administrative tasks for your business there - then you may be able to claim a home office deduction.
"Previously, someone like a plumber, who may have run his office from home and had a secretary there, could not take this deduction because he provided goods and services outside the home," said Degen. "Of course, the IRS realized the inequity there and changed the rules."
Now, this hypothetical plumber could deduct his home office costs, provided he had no offices elsewhere and he used the home office on a regular basis.
4.) Expense new equipment under IRS Section 179.
Whether they work with computers or lawnmowers, small business owners normally write off the cost of equipment as it depreciates over the years. But IRS Section 179 allows you to write off up to $24,000 in equipment costs at once, provided you elect it the first year you put the asset in service.
You must have made enough to qualify for this deduction; you can't elect Section 179 if the deduction creates a net operating loss. There's one other limitation - if you buy more than $200,000 worth of equipment, it reduces your 179 election dollar-for-dollar.
Got it? Here's an example. "Luke and Jane are married taxpayers, and each owns a separate business," said Connie Kurtz, an enrolled agent at Taxmasters, Inc., a tax and accounting services firm in Rockville, Md. "He buys $75,000 in assets; she buys $130,000. In total, they bought and placed $205,000 of assets into service. Since the maximum limit is $200,000, they reduce their 179 by $5,000. So the couple can't take the entire 179 exclusion of $24,000, but the reduced amount of $19,000."
But hey, if you do qualify, go ahead and write off that new dentist's chair. The cap is set to rise to $25,000 after 2002.
5.) Keep track of where you drive.
Make sure you properly account for the mileage on your automobiles, Degen said. If you use your car for business purposes, you're entitled to take 34.5 cents per mile of business travel.
Most people don't bother to keep adequate travel logs and receipts. But keeping track is worth it - the amount can add up.
6.) Open a retirement plan.
Putting funds away in a retirement plan like a Simple IRA, a Keogh plan or a SEP plan reduces your taxable income. There are deadlines throughout the year to establish certain types of retirement plans, so make sure you keep track of the calendar.
A Keogh plan allows you to put away up to 25 percent of your gross income, a SEP plan permits 15 percent, and a Simple IRA allows up to $6,000.
You can open multiple plans, but there are some limitations. There is a cap on the amount that you can end up putting into pension plans - you can't put away more than $35,000 in a SEP or Keogh or more than $6,000 in a Simple IRA, said Bergmann.
7.) Deduct part of your medical and long-term care premiums.
Self-employed folks can deduct 60 percent of long-term care premiums and/or 60 percent of their medical premiums from gross income, said Kurtz. Just keep in mind that in order to take the deduction, you need to have income on Schedule C.
"Both limits are set to rise to 100 percent in 2003," Bergmann added. "The provision was put into place for small business owners who could not otherwise itemize their taxes and would have lost any possible deduction for medical expenses." 
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