03 April 2006

One Blogger's Self-Employment Retirement

It's a small amount involved, but this blog has a pretty good discussion on employment taxes and retirement for those that are self-employed.

SEP-IRAs are basically pension plans for those that are self-employed. You can contribute up to 25% of self-employment income (with a maximum contribution of $42,000) as an employer. As an employee, you can make an additional contribution up to the IRA limit of $4,000 less any contributions to other IRAs (including Roths).

The good thing is that SEP-IRA contributions made by an employer are deductible for income and employment tax purposes, saving 50% in taxes if you are in the top tax bracket (35% income taxes plus 15.3% employment taxes).

So, if you're a blogger and you make income from the site, you do need to report it on Schedule C of your tax return (unless you incorporate). If you are under the income limits for contributing to IRAs, you can make the employer contribution to the SEP-IRA and then contribute the rest of the income as an employee contribution to the SEP-IRA. Your employee contribution will still be taxable for employment tax purposes, but will be deductible for personal income taxes. This way you'll only pay the 15.3% tax on your blogging income now and defer the rest until retirement. On top of that, you can deduct half of the employment taxes paid on your personal return as a business expense.

It's a way to shelter up to $4,000 of blogging income per year, which is better than paying a 50% tax rate on the income.

1 comment:

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