By John Golway, CPA and Founder of Financial Designs Tax Services, LLC
One of your biggest, hairiest bills is likely Uncle Sam. And as an independent contractor, there are some moving parts to your tax planning; however, it also means you can dramatically save in taxes. Let’s break it down.
1) Retirement Savings
As an independent contractor, you may already know you can contribute up to $56,000* per year in a tax-deductible retirement account like a SEP IRA or Individual 401(k). This means if you are in the 24% tax bracket, you could save over $13,000 in federal taxes alone (if you max-out your retirement contribution). If you live in a state that requires you to pay state income tax, there would also be additional savings. And the good news – you don’t have to stop there. If you want to further accelerate your retirement savings AND further slash your tax bill, you can deploy strategies like hiring a spouse or using a Defined Benefit Plan. By using these strategies, you can save over $100,000 in a tax-deductible capacity.
2) Qualified Business Deduction
New in 2018, independent contractor physicians can qualify for a 20% pass-through deduction. This deduction is a BIG DEAL as you can literally save you upwards of $14,000 in taxes in a year. There are some rules to qualify. See more details here.
3) Business Expenses
As an independent contractor, you can deduct your business expenses. These items can add up, and it’s not uncommon to deduct $15,000/year. If your office is at home (and you do not have an office at your place of work), you can deduct your at-home office space as well as the commute to and from work. Independent contractors can also deduct things like licensing fees, cell phone bills, CMEs (including travel), scrubs, etc. Email us at email@example.com to get a full list of deductible business expenses.
4) Social Security & Medicare Tax
Have you heard that as an Independent Contractor you have to pay more in “self-employment” tax? As a W-2 employee, you pay half of the Social Security/Medicare tax owed to the government. Your employer pays the other half. It is true that as an independent contractor you have to pay Social Security/Medicare tax as the employee AND the employer… meaning you pay both halves. However, the IRS allows you to deduct 50% of this (essentially the “employer” portion) which can save you a few more thousand in taxes. Typically, the other financial benefits of being an independent contractor outweigh the fact that you have to pay more in Social Security/Medicare taxes.
5) Health Insurance Premiums & HSAs
As an independent contractor you can deduct the money you spend on your health insurance premiums and the money you contribute to HSAs (HSAs grow tax-free too!) This may not seem lucrative until you add it up… many save $4,000 or $5,000.
Of course there are other tips and tricks we don’t have listed like large car purchases and bunching charitable contributions. For more information about how to find the best tax strategies for your situation, contact your tax professional or our experienced CPAs. You can reach us at 888-898-3627 or make an appointment here: https://www.appointmentcore.com/app/freeslots/KpvdtvV
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*$62,000 for those over the age 50 (in 2019)