It is easy to see why a self-employed individual would see the self-employment (SE) tax as unfair. While in an organization, that same employee would have to pay taxes amounting to roughly 7.65 percent. However, as a self-employed individual, those same federal taxes run approximately 15.3 percent. One of the ways to mitigate this tax is to fill out Schedule C. The following points demonstrate the good and bad qualities of Schedule C, something every self-employed individual should be aware of.
1. Home office deduction: Income tax is reduced in Schedule A deduction, but in Schedule C deduction, in addition to income tax, SE tax is also reduced. There are some misunderstandings about home office deduction. It is not true that you will invite an audit if you mention home office deduction, but on the other hand, if you do not include the deduction you may have to end up paying high tax. Also some believe that same tax amount have to be paid if they include property tax and mortgage interest on Schedule A or home office deduction on Schedule C, which is not the fact.
2. Tax preparation fees deduction: Mention the tax preparation fees on Schedule C and reduce both income tax and SE tax. One can also show the tax preparation fees on Schedule A but there will be less benefit. So always prefer to reduce your taxes.
When itemizing deductions on Schedule A, miscellaneous deductions are limited to two percent of the Adjusted Gross Income for the taxpayer. Therefore any deductions listed under this heading must exceed a certain amount before any benefit is realized from the deduction.
Schedule C has certain limitations. You can mention only the Tax preparation fees, which are the fees you pay for business work done by your accountant. The accountant fees should be split in to two forms, the business form and non-business form. The business forms includes Schedule C, Form 8829 and 4562 and Schedule SE. The non-business forms include Schedule A and Form 1040.
Do not neglect to include such work as paycheck processing, software consultation, keeping books, or the payroll tax returns that were done by an accountant.
3. Tax Preparation software program: There are many calculations to be done while filing Schedule C. Though the tax appears to be 15.3% it is not. First of all the tax is not paid on 100% of the profit but it is paid only on 92.35% , secondly fill in form 1040 and take a 50% deduction on SE Tax. And there is also some calculations on the Medicare portion and the social security portion of the SE Tax. All this seems to be a little complicated, so it is always good to use a software program which can be purchased paying a few dollars.
