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 Tax issues for the self-employed

(Last Mod: 16 March 2011 01:14:29 )



IRS Publications

These links are to 2010 versions that are archived on this website.

For the most recent version, go to the IRS Publications search page and enter the form number.


Overview

If you operate any kind of a small business that generates much revenue at all, then the profitability of that business is going to be greatly impacted by how you deal with a number of issues that, when all is said and done, revolve around taxes.

Now, most people hate the thought of dealing with taxes and assume, with some justification, that the Tax Code is far too complex and convoluted to wade through without paying a CPA or other professional a lot of money, both up front to guide you in making the best decisions about how to structure your company, and then annually to have them file your taxes. It is not uncommon for people to pay $300 to $1000 annually for the services of a CPA when, with a fairly small amount of upfront effort in getting educated, you can do them yourself.

In running my own one-man shop over the years, I have learned about a number of issues and my tax return is fairly involved. None-the-less, I have always filed my own taxes. Once you figure out how to do it once, each year's return serves as an excellent guide for preparing the next year's. Having said that, I recently found myself in a situation where I needed to closely examine whether the path I have taken up to this point represents the best alternative moving forward. Thus I have spent a lot of time over the last few weeks and months exploring all of the key issues that are potentially relevant to my situation. Most of these are relevant to nearly all self-employed people and none of them are in anyway unique to me.

What I have found is that:

  1. You can save some pretty serious money in taxes if you spend some time exploring the issues.
  2. There is an abundance of information that is available out there on the Internet.
  3. Quite a bit of that information is contradictory, so what is right and what is wrong?
  4. Some issues, such as the so-called Solo 401(k), are far worse in this respect than others.
  5. Even many of the mainstream financial planning and investment sites have significant errors.
  6. The IRS Publications are extremely useful, but require some time to get familiar with.
  7. Most investment planners and CPAs don't understand that multiplication is commutative.
  8. There are some nice golden nuggets hidden in the tax code.
  9. Most websites that attempt to deal with these issues are too narrow in focus and don't 'bring it all together'.

Before going any further, it is important that you understand that I am not a professional tax advisor, accountant, or financial planner. Therefore, take what I present here as a possible truth and then confirm it on your own (or with a qualified person that you trust). As much as possible, I will include references to the relevant IRS documents to support my claims, but of course it is always possible that I am not interpreting them correctly.

Another thing that you need to understand is that my focus throughout this effort has been on finding the best overall strategy for my situation. Thus the end result of this discussion will be heavily influenced by that fact. However, from start to finish, I don't simply give some generic description of each issue in isolation to all the others. Instead, after initially discussing the issue as a standalone item, I then walk through how the issue affects the broader topic of your overall tax and finance situation and then add it into a running simulation that allows you to see the overall impact of an entire set of decisions. After all, what matters at the end of the day is identifying the approach that results in the best overall performance. By following along, you should be able to create your own spreadsheet simulation that is appropriate to your situation and then see how to incorporate the results of other issues that I don't even mention but that are relevant to your situation.


Topics Considered

First, we will take a quick look at the options for the fundamental choice we are trying to make - how best to organize our company. We will do so by considering the 'big-picture' description of each and the key differences between them. We will not go into depth on how to actually set any of them up since that varies from state to state. Also, I only plan to explore that topic in depth for the final choice I make for my company.

Then we will look at a number of issues that are impacted by the type of business structure chosen and what some of the options are for each. These issues include: