As a sole proprietor, you know that the 15.3 percent self-employment tax can eat up your profits in a hurry.
You may be able to use a simple strategy to ease this tax burden.
If you own an office building or other assets, you can set up a rental arrangement with your spouse that could significantly cut your self-employment taxes.
Here’s an example of how this strategy works:
Wendy operates a sole proprietorship and earns $100,000 of net income. This income creates a self-employment tax liability of $14,129.55.
Wendy gives the office building to Jim, her spouse, who then rents the office space back to Wendy. Wendy pays Jim $2,000 rent each month (the fair rental value of the building), which moves $24,000 off Schedule C and onto Schedule E. Schedule E, unlike Schedule C, does not give rise to self-employment taxes.
The rent-from-my-spouse strategy cuts Wendy’s self-employment income by $24,000, which puts an extra $3,391.09 of cash in her pocket at the end of the year. And she plans on doing this for at least 10 years, which means she’ll pocket $33,910.90 before considering her investment earnings on this money.
If this idea sounds interesting to you, please call your accountant to discuss whether this strategy is right for you and your situation.