Savings for the Self-Employed

If You're in the Red

While wearing red is very fashionable these days, it doesn't look pretty on an income statement. But things happen, and to get the best tax advantage consider pushing expenses and purchases off to 2007. That means any of the purchases we mentioned above should wait until after the New Year. Hopefully, you'll have some income in 2007 and can write off those expenses against that newfound money.

On the flipside, think about offering some incentives to get your buyers to pay before year-end. Taking payments in December might not be such a bad thing since you won't have much of a tax bill to begin with.

Your Biz, Your Retirement

While we love our independence, saving for retirement is completely our responsibility. So be sure you have a qualified retirement plan set up before Dec. 31, and then make deductible contributions to it for 2006.

You have to set up a KEOGH plan or a Roth IRA by Dec. 31. (The deadline for SIMPLE -- Savings Incentive Match Plans for Employees -- IRAs was Oct. 1.) If your business consists of just you and your spouse, consider opening a self-employed 401(k) (that's what I have). The account has to be open by year-end, but you have until the day you file your 2006 return to make contributions for that year.

And Your Final Bonus

"If you're giving yourself a bonus, use your discretion," reminds Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals.

Many small-business owners decide to give employees bonuses at the end of the year. But be sure to time the expense with your income situation. It might be better to pay them out in 2007. And use those bonuses as performance incentives for next year -- especially if your company was wearing red for 2006.

So here's to being self-employed. While we have to take on many more aspects of the business ourselves, you just can't beat working at home in your fuzzy slippers!