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What is Self-Employment Tax Liability?
Tax liability refers to tax bills you owe to the U.S. Internal Revenue Service (I.R.S.). For a self-employed attorney, tax liabilities can include the following:
- Income tax
- Self-employment tax
- Capital gains tax
- Unpaid recurring taxes
In addition to calculating, filing, and paying taxes on your own as a self-employed lawyer, you also have to pay double what full-time employees pay in self-employment taxes.
The employment tax is 15.3% for self-employed individuals and comprises Social Security and Medicare taxes. W2 employees only pay half this rate (7.65%) while their employers pay the other half.
However, some tax advantages associated with self-employment, such as tax deductions, can help you minimize your tax liability.
To make the most out of your tax deductions, you must plan your finances, track your business purchases, and keep your receipts.
You can choose either itemized or standard deductions depending on your circumstances. But whichever way you choose, as long as you take advantage of your tax deductions, you can maximize your tax savings and minimize your tax bill.
What Are Self-Employment Tax Deductions
Self-employed attorneys can use several tax deductions to minimize their tax liability. They include:
Self-Employment Tax Deduction
If you’re a self-employed attorney, you can reduce your income tax by half your self-employment tax as a business expense.
Qualified Business Income Deduction (Q.B.I.)
If your total income, including your self-employment income and any other income, is below $182,000, you may qualify for a 20% tax reduction.
Home Office Deduction
Every self-employed individual working at home is eligible for this tax deduction. With the simplified home office deduction method, you are entitled to $5 for every square foot of your home office. A home office must be used regularly to hold business meetings and activities to qualify for the deduction.
Phone and Internet Expenses
As a self-employed attorney, you may rely on the phone and the internet to source and communicate with your clients. If this is the case, your business phone and internet bills may qualify for a deduction. Portions of your cell phone and internet bills can be deducted if you can prove the percentage you used for business. However, you can deduct the entire bill if you have a dedicated second phone line for business only.
Health Insurance deductions
Your health insurance premiums are fully deductible as a self-employed. If you pay for yourself only or for your spouse and children under 27 too, you can claim your health premiums as an itemized deduction. However, a health insurance deduction is applicable only if you’re not part of your spouse’s health plan.
Business Travel Expenses
If you go on a business trip that’s longer than a work day, you can deduct its expenses from your tax liability. Travel expenses can include transport fare, accommodation, and meals. However, you can only deduct 50% of meal costs.
Vehicle deduction comes as a mileage rate. You can claim the deduction if you use your car for business trips and commutes. To determine the deduction amount, you can either use the I.R.S. standard business mileage rates or calculate the actual expenses incurred in your work commutes.
You can reduce taxes by making contributions to qualified charitable organizations. Specific charitable contributions in cash or goods can count as business expenses. Receipts or certificates of acknowledgment must support donations that exceed $250 to validate the deduction.
Strategies to Minimize Self-Employment Taxes
There are several tax credit strategies that can help you reduce tax liability as a self-employed attorney, including:
You may choose to file standard deductions because they are easier and quicker, but you may want to consider itemized deductions. The best way to go about this is to calculate both deductions and choose the greater one. What matters is to always track your expenses and deduct them.
Increasing Your Retirement Contributions
The easiest way to minimize your gross self-employed income is by contributing to a tax-deferred retirement plan. You can choose from the following:
- A Simplified Employee Pension (S.E.P.)
- Traditional or Solo Individual Retirement Account (I.R.A. (K))
- Savings Incentive Match Plan for Employees I.R.A. (SIMPLE)
Regular I.R.A. payments are made with pre-tax dollars, reducing your taxable income and total tax liability.
Forming an L.L.C.
Depending on your business income, preferences, and goals, you may choose to form a limited liability company. As a pass-through entity, an L.L.C. may help you reduce your tax liability. L.L.C.s don’t need to file corporate taxes, and all profits and losses are passed through to the owner’s individual tax return. L.L.C.s also offer the most tax flexibility, as you can choose to be taxed as a sole proprietor, S corporation, or C corporation.
Forming an L.L.C. can have long-term benefits but will incur some expenses. If you want to offset your formation expenses and boost your revenue, a law firm marketing agency can help you do just that.
What Taxes Do Self-Employed People Pay?
As a self to Self-employed attorney, you are required to pay the following taxes:
- Self-employment tax:
You must pay self-employment taxes if you earn over $400 from self-employment. It includes Social Security and Medicare taxes at 2.9% and 12.4%, respectively. The government allows you to deduct 50% of your self-employment tax from gross income.
- Income tax:
Federal income taxes vary depending on your taxable income bracket. It starts at 10% for single filers who earn $11,000 or less and goes up to 37% for those earning $578,126 or more.
Depending on where you live, you may be required to pay state taxes in addition to federal taxes.
When Do Self-employed Lawyers Pay Taxes?
Self-employed lawyers who expect to pay more than $1000 in taxes must pay estimated taxes quarterly and file tax returns annually. Estimated taxes are due on April 15, June 15, September 15, and January 15, and they are filed using Form 1040-ES.
How Can Self-Employed Lawyers Reduce Tax Liability?
Self-employed lawyers can use a variety of strategies to reduce taxes. Here are some tax tips for attorneys to consider:
- Identify which deductions you can legally make
As a self-employed, you can deduct your business equipment, travel, utility, and many other expenses. Make sure to keep supporting documents for each expense.
- Make smart purchases and investments
Make tax-friendly investments, and don’t spend lavishly on business equipment or trips. The I.R.S. will only accept reasonable business deductions.
How Can an Independent Contractor Avoid Paying Taxes?
Tax avoidance is any legal means of lowering tax bills. Independent contractors may consider the following ways to reduce income tax while maximizing profit:
- Investing in tax-advantaged retirement plans
- Choosing a business structure that lowers the tax burden
- Consolidating all deductions and claiming them
How Can Constellation Marketing Help Attorneys?
Minimizing your tax liability is one way to boost your earnings as a self-employed attorney. Another way to do so is through effective marketing.
Constellation Marketing can help you generate more leads, cases, and revenue. Book a call now!