Strategic Decisions The Entrepreneur Must Make |

While this document was prepared for a few of my truck driving clients, it can apply to almost any of you who are starting a business, operating as a solo business operator, or a self-employed individual.

Choosing the sort of business entity under which you operate is a highly strategic decision. (You should refer to my book below for a longer discourse on the subject.)

This choice sets whether you owe self-employment taxes. That is a 15.3% bite from your net income. Yes, you can owe self-employment taxes and not a dime in income taxes! (Note: The IRS does provide a 7.65% credit on your tax bill, since a self-employed individual pays both the employer and the employee portion of Social Security and Medicare; the credit is for the employer portion- but only applies to taxes owed.)

If you were to elect to operate as a Limited Liability Corporation (LLC) or a corporation (either S entity or C entity), then the employer tax bite can be radically changed. An LLC will either be a partnership (yes, there must be two or more of you), an S entity (corporation), or a C entity (also a corporation). You will compensate yourself with a reasonable salary, which would normally be less than the net earnings of your business- which lowers the self-employment taxes.

Please remember that if you elect to operate as C corporation, there is the problem of double taxation; both the net income of the business (lat tax rate (21%) of C Corporations) and any dividends you distribute to yourself are subject to personal income tax.

This brings up the elephant in the room. Too many small business folks (especially truck drivers) fail to maintain adequate bookkeeping. This is one way to make an enemy of the IRS. Not to mention that you might miss out on some valuable tax savings, since you lack the records to list them on your tax returns.

Any expenses incurred that are associated with earning your income are deductible. (OK, not entertainment- that doesn’t really help you make more money; moreover, business meals are only 50% deductible. But the rest of the expenses usually do lower the tax bite.) This even includes some “personal” expenses- uniforms, gloves, boots, overnight stays, etc.

Finally, you must realize that tax planning means looking forward to end of the current year. You cannot change anything that was spent or earned in the year that just ended.