| As an independent consultant, you’re in business | | | | proprietor, LLC or S Corp), your out-of-pocket |
| for yourself, and therefore have all the increased tax | | | | expenses will have to be equal to or greater than |
| burdens that come with being a business owner. | | | | 7.5% of your adjusted gross income before you would |
| Fortunately, there are strategies that can help reduce | | | | be eligible to take these deductions. A consultant |
| your tax liability. | | | | earning $80,000 per year could probably easily meet |
| The biggest tax burden associated with being a | | | | this threshold, which would equal about $6,000. On the |
| business owner is the self-employment tax, which is | | | | other hand, a consultant earning $200,000 per year |
| basically the portion of social security and Medicare | | | | would have to have a significant amount of |
| tax that would be paid by an employer if you were | | | | out-of-pocket medical expenses in order to be eligible |
| working for someone else. Since you are | | | | for this deduction, approximately $15,000. |
| self-employed, you are responsible for payment of | | | | Working with an employer of record might allow you |
| both the employee and the employer portion of social | | | | to deduct all of your out-of-pocket medical expenses |
| security and Medicare taxes, which is currently equal | | | | up to a given limit, without the need to qualify by |
| to an additional 15.3% of your earnings. | | | | meeting a threshold. Not all employer of record |
| Choose a legal structure that makes sense for your | | | | companies operate the same – some are geared |
| business. There are several legal structures to choose | | | | toward independent consultants and some are not -- |
| from, and it’s advisable to speak with an attorney | | | | so complete your research before signing on to see |
| to determine which structure makes the most sense | | | | what strategies they can offer you to help reduce |
| for you. While some structures will leave you subject | | | | your taxable income. |
| to paying self-employment taxes, other structures | | | | It’s also possible to take deductions for the cost of |
| could be subject to something called, “double | | | | dependent care, which includes both child care and |
| taxation,” in which the corporate entity is taxed on | | | | elder care. The amount of these deductions that can |
| earnings, and then wages paid to employees, including | | | | be taken is limited, typically up to $5,000 per year. If |
| yourself, are taxed again on a personal tax return. | | | | you’re working with an employer of record |
| Speak with a professional to determine which type of | | | | organization that offers an expense reimbursement |
| business structure will allow you to maximize your | | | | program, sometimes this limit can be higher, even up to |
| take-home earnings. | | | | $10,000 annually. Most people are aware that childcare |
| Working with an employer of record could help to | | | | costs can be deducted, but not many realize that elder |
| reduce your tax liability. A portable employer of record | | | | care is included in the dependent care category. If |
| can serve as a corporate infrastructure for | | | | you’ve got a parent in a personal care home, |
| independent consultants, and eliminate both the need to | | | | assisted living facility, nursing home or even an adult |
| set up a formal business entity and reduce self | | | | daycare setting, you can easily rack up $5,000 to |
| employment tax liability. When working through a | | | | $10,000 a year in expenses. |
| portable W-2 employer of record, you still have to pay | | | | Don’t forget about your miscellaneous deductions. |
| for employer side taxes just as you would if you were | | | | Items such as professional organization dues, certain |
| on your own, however this business structure option | | | | education expenses, professional books and trade |
| can greatly reduce your tax liability on retirement | | | | magazines, home office expenses, work clothes and |
| contributions and other benefits programs. | | | | uniforms, mileage, business travel, lodging, and 50% of |
| Maximize your itemized deductions to reduce your | | | | business meals are tax deductible, some of which are |
| taxable income. Reducing your total taxable income by | | | | deductible only if the total exceeds 2% of your |
| taking credit for every deduction for which you’re | | | | adjusted gross income. Working with an accountant |
| eligible will reduce your total tax liability. Many individuals | | | | can help you make sense of all the various deductions, |
| fail to take deductions for any out-of-pocket medical | | | | and help you reduce your total tax liability by advising |
| expenses that they incur. This can mean medical | | | | you how to keep track of your deductions. Also, some |
| premiums, co-payments, over-the-counter medications, | | | | employer of record organizations even offer a |
| and even procedures and tests not covered by | | | | simplified process of keeping track of and taking |
| insurance. | | | | business deductions, so be sure to ask about business |
| If you’re in business for yourself (as a sole | | | | expenses when investigating this option. |