As an independent consultant, you’re in business for yourself, and therefore have all the increased tax burdens that come with being a business owner. Fortunately, there are strategies that can help reduce your tax liability.

The biggest tax burden associated with being a business owner is the self-employment tax, which is basically the portion of social security and Medicare tax that would be paid by an employer if you were working for someone else. Since you are self-employed, you are responsible for payment of both the employee and the employer portion of social security and Medicare taxes, which is currently equal to an additional 15.3% of your earnings.

Choose a legal structure that makes sense for your business. There are several legal structures to choose from, and it’s advisable to speak with an attorney to determine which structure makes the most sense for you. While some structures will leave you subject to paying self-employment taxes, other structures could be subject to something called, "double taxation," in which the corporate entity is taxed on earnings, and then wages paid to employees, including yourself, are taxed again on a personal tax return. Speak with a professional to determine which type of business structure will allow you to maximize your take-home earnings.

Working with an employer of record could help to reduce your tax liability. A portable employer of record can serve as a corporate infrastructure for independent consultants, and eliminate both the need to set up a formal business entity and reduce self employment tax liability. When working through a portable W-2 employer of record, you still have to pay for employer side taxes just as you would if you were on your own, however this business structure option can greatly reduce your tax liability on retirement contributions and other benefits programs.

Maximize your itemized deductions to reduce your taxable income. Reducing your total taxable income by taking credit for every deduction for which you’re eligible will reduce your total tax liability. Many individuals fail to take deductions for any out-of-pocket medical expenses that they incur. This can mean medical premiums, co-payments, over-the-counter medications, and even procedures and tests not covered by insurance.

If you’re in business for yourself (as a sole proprietor, LLC or S Corp), your out-of-pocket expenses will have to be equal to or greater than 7.5% of your adjusted gross income before you would be eligible to take these deductions. A consultant earning $80,000 per year could probably easily meet this threshold, which would equal about $6,000. On the other hand, a consultant earning $200,000 per year would have to have a significant amount of out-of-pocket medical expenses in order to be eligible for this deduction, approximately $15,000.

Working with an employer of record might allow you to deduct all of your out-of-pocket medical expenses up to a given limit, without the need to qualify by meeting a threshold. Not all employer of record companies operate the same – some are geared toward independent consultants and some are not -- so complete your research before signing on to see what strategies they can offer you to help reduce your taxable income.

Page 1 of 2 :: First | Last :: Prev | 1 2 | Next