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Wednesday, July 22, 2009
Kathy Kristof :: Townhall.com Columnist
So You're a Consultant Now? Deduct Like One.
by Kathy Kristof
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You may not like how your consulting career was born, but there are some benefits to being your own boss, not the least of which are federal income tax breaks.

The moment you join the ranks of the self-employed, you get access to dozens of tax deductions and credits that aren't available to other working stiffs. Here are a few that can help get your consulting business rolling and save you a fortune next April.

HIRE YOUR KIDS

Under normal circumstances, kids are expensive. You pay them an allowance, or just pay for their stuff, like their clothing and college. But when you're an entrepreneur, you can stop giving them money and start making them work for you.

If they are under 18, there's no Social Security, Medicare or unemployment due on their wages. If you pay them less than $5,700 over the course of a year, they don't have to pay income tax either. You get the write-off and get them off the couch.

There are no specific rules demanding what they do or how much you can pay them per hour. You are the employer. You get to make those calls, although the Internal Revenue Service expects you to pay a market wage.

But your children should be legitimately working for the company, and you should keep track of their hours and wages, just in case the IRS ever asks, said Jennifer MacMillan, a tax specialist from Santa Barbara, Calif.

Even a small child could be employed if you had the right reason. One dentist used his 4-year-old in his marketing materials, for example, and paid her a modeling fee (directly into her Roth IRA).

Older kids can file documents, fix computer glitches, investigate social-media sites for marketing purposes, or simply run errands such as getting things copied or fetching office supplies. (Child labor laws generally don't apply to your own kids.)

WRITE OFF YOUR CAR

If you use your car at least 50 percent for business, you get access to the most lucrative deductions, including accelerated depreciation of the vehicle, said Rob Seltzer, a certified public accountant in Beverly Hills, Calif. You may know that commuting miles are not tax deductible, because they are considered personal. Other auto-related deductions are also more difficult to come by if you're an employee.

But now that you're a consultant working from home, you have no commute. Every time you hop in the car to meet with a client or sell your services, it's a business trip. That can vastly increase your auto deductions -- particularly if you have a costly leased vehicle, Seltzer said.

Your lease payments, gas, insurance and repairs are all deductible based on the percentage that you use the car for work. (State vehicle registration fees are always deductible, whether you're a business owner or not.)

Let's say your lease payment is $500 a month, you pay $250 a month for auto insurance, and you shell out an average of $100 a month for stuff like new tires, maintenance and repairs. That's $850 monthly, or $10,200 a year. Assuming that you now use the car 75 percent for business, you get to subtract $7,650 from your business income. Continued...

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About The Author

Kathy Kristof is a personal finance writer.

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