You know what can eat up your profits? That 15.3 percent self-employment tax.
As a sole proprietor, you probably already know this.
Let me tell you about a simple strategy to ease this tax burden, and this involves utilizing your spouse. First things first, you have to create your own entity.
If you own an office building or any other assets, you can set up a rental arrangement with your spouse that could significantly cut your self-employment taxes.
Here’s how it works:
Amy operates a sole proprietorship and earns $100,000 of net income. This income creates a self-employment tax liability of $14,129.55.
Amy gives the office building to Jamie, her spouse, who then rents the office space back to Amy. Amy pays Jamie $4,000 rent each month (let’s say this is the fair rental value of the building), which moves $48,000 off Schedule C and onto Schedule E.
Schedule E, unlike Schedule C, does not give rise to self-employment taxes.
The rent-from-my-spouse strategy cuts Amy’s self-employment income by $48,000, which puts an extra $6,782.18 of cash in her pocket at the end of the year. Pretty great, right?
And she plans on doing this for at least 10 years, which means she’ll pocket $67,821.84 before considering her investment earnings on this money.
This is a straightforward strategy that can significantly cut your taxes. That way you can focus on elevating your business without fearing that self-employment tax.