Tax Considerations for the Self Employed

Many taxpayers in northern Michigan are self-employed. Whether you own your own business, are an independent contractor or just periodically provide freelance services in addition to another job, you must pay self employment or "SE" tax to the federal government in addition to any other tax liabilities you may have. Here are a few points applicable to 2011 taxes:

SE Tax Cut for 2011 Income

The SE tax helps fund Social Security and Medicare, similar to the FICA taxes paid by employees and employers. It is comprised of an old age, survivors and disability insurance tax (OASDI) as well as Medicare. Rates are usually assessed at 12.4 percent for OASDI (up to $106,800 in income) and 2.9 percent for Medicare. However, for 2011 earnings, the OASDI rate was temporarily reduced by 2 percent to 10.4 percent thanks to the Tax Relief Act of 2010. Temporary rates are slated to revert back to the previous level in March 2012 but could be extended longer if approved by Congress.

Self Employed Health Insurance Deduction

Health insurance premiums for the self employed and their families are no longer deductible on Schedule SE beginning in 2011. Premiums are still allowed as a deductible expense on individual 1040 returns. For future planning, there may be advantages for self-employed taxpayers to set-up and contribute to a health savings account (HSA). There are situations when HSAs can be established for individuals with high-deductible health insurance policies.

Mileage Deductions

The IRS increased standard mileage rates midway through 2011. If you used your personal auto for business purposes between January and June 2011, mileage can be deducted at 51 cents per mile. Rates rise to 55.5 cents per mile for mileage between July and December 2011. Rates remain at 55.5 cents for 2012. Taxpayers always have the option to deduct actual auto expenses rather than the standard deduction. The key in either case is to maintain good records reflecting details of personal and business use, such as a mileage log and all auto related costs. Evaluate which is the better option in your specific situation. This can change from year to year.

New Business Property Purchases

Look at strategies that could help reduce tax liabilities. One is related to equipment or property purchased for your business. Section 179 provisions allow business owners to expense tangible personal property such as equipment or furniture in the current year rather than depreciate costs over several years. This year, section 179 expensing is allowed for up to $500,000 in tangible personal property placed in service in 2011. There are limits within the provision for such variables as taxable income and in cases when more than $2 million in tangible personal property is purchased within the year. Also, a 100 percent bonus depreciation is available for new assets purchased in 2011. In cases when a new building is constructed or building improvements are made, additional strategies might apply.

Retirement Plans

Make sure you are funding retirement plans as much as possible and taking advantage of deductions allowed for contributions to Keogh, SIMPLE or SEP retirement plans. Solo 401(k) plans can be an option.

Keep Good Records

Good records are essential for good tax planning and, especially so, for the self employed. Make sure that you have organized and adequate information on all of the past year's income from self employment, including 1099 forms, invoices and check stubs from payments received, and bank statements as well as your own records Have similar documentation for your expenses – i.e. business equipment and capital improvements, investments, payroll, operational expenses and travel, among others. Good record-keeping allows you to take full advantage of tax deductions you are entitled to, while streamlining tax preparation and tax planning. It is highly recommended that all businesses, especially the self-employed, use an accounting software program, such as QuickBooks, to track income and expenses, and that a separate bank account is set up for the business and kept independent from any personal activities.

Each situation and every taxpayer is unique. Tax provisions may also be altered by Congress as 2012 continues. It is always important to confer with your tax advisor to understand the most current tax provisions, how they apply to your business and the best strategies to pursue.

Shelly K. Bedford, CPA, MST is a tax partner at Dennis, Gartland & Niergarth in Traverse City. She is a multistate tax specialist with significant experience with closely-held businesses, manufacturing, agribusiness and related industries. For more information, contact Shelly at 231.946.1722 or or visit