Turning Passion into Deductions: Unveiling Tax Breaks for Creatives
Creatives, we know that taxes might not be the most exciting topic in your entrepreneurial journey, but what if we told you they could significantly impact your financial success? That's right, by leveraging tax breaks, you can turn your passion into deductions and keep more of your hard-earned money for your creative pursuits.
Sole Proprietors: Deduction Strategies
As a sole proprietor, you have a powerful tool at your disposal: The Section 105 Plan. This often-overlooked strategy allows you to deduct 100% of your medical expenses, including health insurance premiums, as a legitimate business expense. Imagine reducing your taxable income while enjoying the benefits of comprehensive health coverage.
The Section 105 Plan is essentially an employer-sponsored health plan for sole proprietors. It allows you to write off the cost of your health insurance premiums as a business expense, reducing your taxable income and ultimately saving you money on taxes. By setting up this plan properly, you can reimburse yourself for various medical expenses, from deductibles to prescriptions, using pre-tax dollars.
However, if you want to maximize the benefits of the Section 105 Plan, you must follow certain rules set by the IRS. Someone who specializes in accounting for creatives will be able to walk through this with you to ensure all of the pieces of the puzzle fit together.
Hiring Your Child for Tax Deductions
Consider this innovative strategy: hiring your child to work in your creative business. Not only does it provide them with valuable experience, but it also generates tax deductions and tax-free income for both you and your child. You can save on taxes while nurturing your child's entrepreneurial spirit.
If you have children under the age of 18, you can hire them, and their wages will be exempt from Social Security tax, Medicare tax, and FUTA tax. The FUTA tax exemption lasts until the employee-child reaches age 21. They can be part-time, full-time, or whatever works for you and your child, but they must be paid less than $1,000 per month.
You can save money on taxes and give your child the opportunity to start saving for college early by hiring them. They can put money into a Roth IRA or 529 plan. Their tax band is probably lower than yours, so even if their earned income is more than the standard deduction threshold, they will still pay less in taxes overall for the family.
S-Corporations: Lowering Self-Employment Tax and Generating Tax-Free Income
For those whose creative businesses are thriving, transitioning to an S-Corporation can be a game-changer. This move can substantially lower your self-employment tax by carefully balancing salary and dividends.
Lowering Self-Employment Tax
Self-employment (SE) tax consists of Social Security and Medicare taxes primarily for individuals who work for themselves. Generally, if you have net earnings over $400, you have to pay self-employment taxes. The SE tax rate is 15.3%, mirroring the tax an employee and employer would pay for FICA if you worked for someone else.
However, as a sole proprietor, all of the profit from your business is subject to SE tax. By transitioning to an S-Corporation, which doesn't pay self-employment tax on its profit, you can significantly lower your overall taxes.
Generating Tax-Free Income
Additionally, the Augusta Rule is a hidden gem in the tax world. This rule allows you to rent your residence to your business for less than 15 days a year, generating tax-free income. At Core Group, we can help you learn how to apply this rule strategically and boost your income while keeping it tax-free.
Strategies for Both Sole Proprietors and S-Corporations
Paying for College as a Business Deduction
Education is vital, and it can also be a powerful tax-saving strategy. Our outsourced tax preparation services will help you understand the tax benefits of education expenses and how to leverage business deductions to cover college tuition costs. Whether it's for you, your child, or another family member, paying for college can become a smart financial move.
Combining Business and Personal Travel
Turn personal trips into business expenses by seamlessly blending leisure and work. Learn how to maximize tax deductions while enjoying some well-deserved relaxation and transform ordinary trips into strategic financial opportunities.
Individual 401K Plans for Tax Reduction
Building wealth outside of your creative business is crucial for long-term financial security. That's where individual 401(k) plans come into play. Discover how these plans allow you to enjoy higher contribution limits, tax deductions
In summary, tax advantages for creatives are a plan to ensure your financial success, not merely a means to lower your tax return. A more comfortable retirement, more funds for your artistic pursuits, and less stress about paying taxes are all possible outcomes of adopting these deduction options.
Ready to take action? Reach out to Core Group, your trusted financial partner, for expert guidance on outsourced bookkeeping services, outsourced tax preparation services, and wealth management. We specialize in accounting for creatives, offering small business bookkeeping services to creative business owners like you. Our team is here to support you on your journey to financial success.
Don't let taxes hold you back from pursuing your creative dreams. Turn your passion into deductions and thrive as a creative entrepreneur. Your financial success starts now!
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