(These are general record keeping tax tips. They should in no way be used or considered as a substitute for the advice of a qualified tax professional (CPA or attorney).)
It's very simple: the more tax deductions your business can legitimately take, the lower its taxable profit will be, and the more deductions you can shift from your personal expenses to your business expenses, the lower your tax bill will be.
Think back to your tax return. Do you remember all the deductions you put on your Schedule A only to find out that the standard deduction was greater than your itemized deductions, anyway?
As a small business owner/independent consultant you can shift most of those deductions to your Schedule C and lower your adjusted gross income (AGI). That in turn will benefit you by making the 2% or 7.5% floor lower, allowing more of the deductions you weren't able to take because of those constraints.
There are four basic forms of business, each of which has tax, liability, organizational, and funding advantages and disadvantages. I have a whole presentation about the forms of business, their advantages and disadvantages, but I'll try and condense it here. The forms of business are a sole proprietorship, partnership, limited liability company, and corporation.
For tax purposes, a sole proprietorship is you. In the eyes of the IRS and the state comptroller you are your business and your business is you.
Similarly, a partnership is two or more individual people who share in the business. The business files an informational return with the IRS, and taxes are reported on the individual partner's tax return. Similarly, a partnership is two or more individual people who share in the business. The business files an informational return with the IRS, and taxes are reported on the individual partner's tax return.
Limited liability companies can be taxed as a sole proprietorship, a partnership, or as a corporation - depending on their choice - under IRS rules.
There are two types of corporation for the IRS - a C-Corp and an S-Corp. The C-Corp is a regular corporation - with personal protection for the shareholders, etc. An S-Corp has the same liability protection, but it is taxed by the IRS like a partnership. But again the state will impose a Franchise Tax on all corporations.
The self-employment tax rate on net earnings remains the same for 2005. This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). For social security tax, the maximum amount of 2005 wages subject to the tax increases to $90,000. All net earnings of at least $400 are subject to the Medicare part.
There were major changes in the tax rates in 2003. Some of the changes stay with us until 2010, some phase out in 2006. Be sure to check IRS publications or use a good quality tax program/software that is up to date for 2005.
