Tax Traps: Paying Too Much Self-Employment Tax


Many solitary proprietors and partners compensate too most self-employment tax, generally those who acquire $125,000 or reduction and have kids. Those farmers competence breeze adult profitable some-more in self-employment taxation than they would in income tax, says Paul Neiffer, The Farm CPA.

Consider that self-employment taxes on $125,000 income—a flattering good income adult until 5 years ago—is about $18,000. Income taxes, on a other hand, after holding deductions for 3 kids and “everything else,” would be closer to $7,000 to $10,000, says Neiffer.

How do we revoke self-employment taxes? Neiffer advises farmers initial to reason their tillage operations and land in apart taxation entities. In that way, a lease they assign themselves for land typically is not theme to self-employment taxes. He also suggests that farmers compensate their children for plantation labor.

Neiffer recommends that commencement farmers with children cruise environment adult a Subchapter C Corporation, even yet that could give arise to double taxation later. In a meantime, if a C Corp. is determined properly, a farmer’s homestead, including a utilities and furnishings, can be entirely deductible.

“And then, if we structure it properly, all a groceries and dishes that are supposing to a employees of a corporation, including a owner—as prolonged as they are supposing to everybody concerned in a plantation operation—are during slightest 50% deductible, or 100% deductible in some cases,” says Neiffer. “And it’s tax-free to a owner.”

Health word can also be tax-free and deductible, if structured scrupulously and there’s usually one employee. If there are mixed employees, and we haven’t bought a right health word policy, we competence be theme to a chastisement of as most as $100 per day per employee, Neiffer warns. Extreme caring contingency be taken in structuring tax-free health word benefits.

But it’s mostly tiny or commencement farmers who mount to advantage from this approach. “If you’ve got 5,000 acres giveaway and clear, this competence not be that large of a deal,” Neiffer says.

Farmers infrequently compensate too most in self-employment taxes, though there’s also a risk in profitable too little. They need to find a honeyed spot.

“We wish to make certain that farmers compensate in a certain volume of self-employment taxation to build adult their amicable confidence benefits,” Neiffer says. “A good idea would be to compensate self-employment taxes on about $10,000 of gain per year during their career. Otherwise, they competence not have built adult adequate to maximize their tier one amicable confidence advantages during retirement.”


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