*Note: This was written by a Yahoo! contributor. Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
As a freelance worker and independent contractor I know how stressful tax time can be. I also know how important it is to protect your bottom line. It might already be too late in the year to implement some of these tips but at least you will have the information you need to make next year a great one.
Claim your children as employees. Did you know that as a Freelancer or Contractor you can actually claim your children as employees and significantly reduce your taxable income? On top of that, if you are smart about it, you can make sure that the income you do pay your child falls under the standard deduction rule resulting in a no tax cost to your child. This is a complicated issue given that the amount you can pay changes from year to year as well as the requirements as to whether you need to withhold taxes from them. So make sure to get professional advice. The fact, however, remains that you can realize significant tax savings using this one tip alone. Key items to remember:
a. If you are a parent, FICA tax purposes does not include services performed by a child under the age of 18 while under the employment of their parents
b. The work that you ask your child to do must be reasonable and legitimate in order to deduct the wages as a business expense. For example, if they are old enough to know their ABC’s they can act as your file clerk. They can also perform janitorial services by cleaning your office and taking out the trash. Further you are allowed to pay them the going market rate!
To give you an idea of the power of this let’s look at an example;
Assume you made enough money that you are placed in the 35% tax bracket. Assume you place your child under employment and pay her a total of $5,350. By doing that you reduce your tax by $1,872.50! Now imagine the benefit if you have more than one child!
You must have a home office. Entire books have been written on this subject alone. The fact of the matter is that you can realize significant tax advantages by using a home office. There are some key items that you must remember, the most important of which is that you cannot claim a home office if that office is not used as a customary place of work. In other words, you have to have a home office and you have to use it! The other key point to remember is that the amounts that you can deduct to change so make sure you check with a professional or use a professional tax preparation service.
Know your deductions. This tip goes hand in hand with having a home office. Did you know that by having a home office you can deduct the square footage that you use as an office? You can write of meals and entertainment, repairs or remodeling for the home office are completely deductible and you can write of portions of your internet bill, phone bill, water bill, heating bill, and more! You can also write off medical insurance premiums and more importantly by creating a medical reimbursement plan you can normally write off those expenses not covered by your standard insurance like braces, massages, vision, etc.
You must keep and maintain impeccable records. Do I really need to go into any detail about this? Home based small businesses list as a “flag” for potential audits with the IRS. For more information visit this in depth report published by US news. http://money.usnews.com/money/business-economy/small-business/articles/2009/09/04/the-perils-of-running-a-business-from-home.html
Consider incorporating in Nevada. The real tax advantages that you can obtain by incorporating in Nevada are well worth the effort. There are no corporate income tax, no franchise tax, and no taxes on corporate shares. Nevada laws specifically state that companies with multi-jurisdictional sales that can be domiciled without a physical structure, internet companies being one of the most often cited, are allowed to incorporate. If you are like me who, as a freelance writer, sells my services to people all over the country and even the world incorporating in Nevada is a gold mine!
“State taxes are becoming an increasing liability to a company’s operating expense,” says Derek Rowley, a resident agent for Corporate Service Center in Reno and board member of Nevada Corporate Headquarters in Las Vegas. “Because of federal tax reform, the state slice of the tax pie has become the larger part [in some cases]. This draws attention to Nevada, particularly for a company that does business in a large number of states. For example, if you are a California company, all the income is taxable by California. If you incorporate in Nevada, only the California income is taxable [by California].”
On top of that, Nevada’s privacy laws are a real benefit. There are minimal reporting and disclosure requirements which keeps actual shareholders out of the public records and Nevada has no information sharing agreement with the IRS.
In my opinion the protection that is provided to corporate assets against its creditors is the greatest appeal of incorporating in Nevada. Did you know that Nevada law prevents creditors from dismantling companies and liquidating assets to satisfy the company’s debt?
In today’s litigious society the protection against prying eyes and the protection of corporate assets makes incorporating in Nevada a serious consideration.
More from this contributor:
First Person: How to Reduce Costs and Increase Productivity
Retirement Plan Not Working? Here’s Why
What does the weakening US Dollar Really Mean