Starting a business
Once you decide it's time to break out of the corporate cubicle and start a new business, the tax code can help.
Filing is relatively easy for sole proprietors. They report their income as part of their annual individual tax filing by attaching Schedule C to Form 1040. Schedule C also offers many ways for individual entrepreneurs to write off many of their business expenses.
Among the deductible small-business costs are home office expenses. Business use of a vehicle also is deductible, as are health insurance premiums and contributions to self-employed retirement plans. New businesses also are allowed to deduct thousands in certain startup costs.
If you have kids, putting them to work in your sole proprietorship could be a tax-smart move. Depending on how much you pay them, they might not owe income taxes and you can deduct the salary as a business expense.
But starting a business is not all about tax breaks. Sole proprietors also must pay self-employment taxes. These are the equivalent of the payroll taxes collected from wage-earning employees. As both the employer and employee, a sole proprietor has to pay the boss and worker components of Social Security and Medicare taxes.