Sole Proprietors

Getting a job with an employer has several benefits, chief among them being health care and other benefits.

When you are your own employer, you have to pay for health coverage and other benefits out of pocket. For tax purposes, your contribution to health premiums, if self-employed, may constitute an above-line dedication.

When working as an employee, 7.65% of your pay is taken out for social security and then your employer matches that amount. When self-employed, you have to pay the entire amount. In other words, you must contribute to social security at a rate of 15.3% and only one half of that contribution may be deducted above-line.

If you are self-employed, you also have to plan for your own retirement. You could contribute to an IRA, but your contribution is limited to $6,000 a year. There are other retirement savings options, such as a solo 401K, a Keough, a SEP and a simple account, and these contributions may be listed as above-line deductions as well.

Since 2018, business owners are able to take a qualified business income deduction, which permits 20 percent of profit to be taken as a below-line deduction. If the profit in one year is $100,000, then $20,000 could be taken as a below-line deduction. Unfortunately, this deduction does not apply to certain professions such as lawyers, doctors, accountants, and consultants if they make too much money (AGI in excess of $400,000).

According to the tax professor I had, an entrepreneur should never marry an entrepreneur to best take advantage of benefits, such as employer-based health care and retirement options (such as 401Ks and 403Bs).

This column is not intended to provide legal, tax, accounting or other professional advice of any kind. For tax advice, please visit a Certified Accounting Professional. Jehan El-Jourbagy is a professor of business law and ethics at Georgia College & State University.