I am in the highest tax bracket plus I work for myself. I am going to have to pay this IRS half of my income!?

Question

What can I do to keep the amount I owe them to a minimum?

Answer 1

No, you will not pay anywhere near that much to the IRS.  The highest rate is 35%.  Some will argue that with the 15.3% self employment tax you'd be paying 50% however that will drop to 2.5% once your profit hits $102k.  At that point, your marginal rate would be either 25% or 28% however your net rate would never hit 40%, let alone 50%.  Even adding in State income taxes, you'd still be less than 50% in nearly all cases.

You can minimize that both with careful accounting of your business expenses and careful choices on some of the places you tuck your money away.  Don't forget that since you're self-employed your health insurance is deductible as a business expense, not as an itemized deduction.  And select your retirement savings plan carefully.  Some are much better than others for self-employed folks.  A traditional IRA would be a lousy idea for you, however a SEP might be just what you need.

Don't spend money to save taxes.  That is a fools mission as long as tax rates are less than 100% and they'll always be less than that.  Buying a home might be a good idea since it provides shelter as well as wealth accumulation, however you'd statistically do better in the stock market than owning a home.  Many wealthy folks rent and put the difference in the stock market and come out better in the long run.  At the very least, don't over-buy as the tax savings from home ownership are less than most folks think.

Your best investment would be in a good tax expert AND a fee-based financial planner.  Their fees are tax deductible and good advice will carry you a long way.  Most importantly, do NOT focus on the tax bill exclusively!  It's easy to fall into that trap and lose site of your REAL goal of maximizing total wealth.  Taxes are part of the equation of course but they are NOT the end goal.  A strategy that doubles your taxes but triples or quadruples your total WEALTH is an extremely positive outcome.

Answer 2

It appears that you have self-employed income as well as other income based on your statement that pushes you up to the highest tax rate.

Remember that you will be taxes on "net income" (gross revenue less expenses) so it would depend on that income amount regarding the self-employed income.

The highest fed rate is 35% than add self-employment tax of 15.3% then add your state income tax, if applicable.

Now, you also get some personal deductions to offset your income.

It really depends on both your income and deductions as your question is very general.

You should seek the assistance of a local tax practitioner.

Answer 3

Well I give you credit for asking now...it seems your on the right track. My major complaint from (new) clients is that I didn't know that. And, then I have to tell them that it is to late now you should have called me before you did that...it is the reason my office is open year round.

From the information given it is impossible to even give you a hint. I don't even know what you do.

I would suggest finding an Enrolled Agent that has been around for several years...then sit down and have a talk.

Hope this helps.  

Answer 4

Get a good accountant. Not only do you want to minimise your tax liability but you want to make sure you remain legal.

Answer 5

Read about self employed (or independent contractor) tax filing and payment of estimated taxes: http://taxipay.blogspot.com/2008/04/tax-...

Answer 6

The highest IRS bracket is 35%, and that's only on the dollars over the limit for that bracket so your effective rate is somewhat less than that.  Even adding the self employment tax, it doesn't hit half, but if you are in a state with a high state tax, it could be over half total for IRS and state.

Work with a good accountant to be sure you know what deductions you can take.

Answer 7

If you don't have too many employees, you could set up a retirement plan to shield some of your income from taxes.  If you are paying 35% income plus 15.3% self-employment tax, you will pay half of your net profit to the government.

Find a good CPA to make sure you minimize your taxable profits.