Beating the Marriage Tax Penalty

By Kathy Zucker

When it comes to income taxes, having two medium-sized incomes is a lot worse than having one big one.

mompreneurI started staying home six years ago to provide work-life balance for my family. The decision to stay home was facilitated by the fact that I immediately started working as a consultant for my former employer. I initially worked as a sole proprietor and converted my business to to a single-member limited liability corporation (LLC) when I started picking up more clients.

Guess what I discovered? Even though our household income stayed essentially the same, our tax rate dipped down to an incredibly low 15%. How was that possible given that I had to pay an extra 7.65% in self-employment taxes?

There were several factors that contributed to the tax rate decrease.

  • All my income came through schedule C and was offset dollar for dollar by business deductions. When you itemize deductions you only get about 30¢ back on the dollar. Daycare, private preschool tuition, child classes, summer camp expenses? All deductible because they allowed me to work.* These were all costs we would have incurred whether I was working or not, but working for myself enabled me to deduct them. Also deductible? Lunches out, trips into the city, office supplies, car expenses and mileage, cellphone and internet bills.
  • We bought a large home with a sizable home office (must have a door that closes to qualify); I was able to proportionally deduct part of our mortgage, heating and electricity bills. I was also able to deduct furniture purchases, lighting fixtures, cleaning supplies, and anything purchased for my office.

Struggling to balance parenting with your career?

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What are the cons to working for myself?

What if I suddenly start making so much money that my profits substantially exceed my deductions? This is one of the major pros to being self-employed. I can contribute up to $49,000 annually to a solo 401k or SEP-IRA; both contributions and income are taxed only when I make a withdrawal. A hefty 401k contribution would put my income back down to almost zero.

What do you need to replicate my tax setup? 1099 income. That is the key to using schedule C on your income tax returns. And the tax filing is not any more complicated than a regular 1040 because the income passes through to schedule C of your personal tax returns; no need for a separate corporate filing.

* I am not a tax professional so do not have all the details, but in a quick conversation with my accountant, she mentioned the Dependent Care Tax Credit as being a factor in my household deductions. Turbotax also adressed the question of deducting preschool costs. If you are thinking about starting a business, it’s a good idea to consult with a tax expert to determine the best route to manage your family’s finances.

Kathy Zucker, serial entrepreneur and mother of two toddlers, writes about juggling career and family in an urban setting. See what Kathy is up to at her blog and on Twitter.


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5 Comments

  1. Kathy Zucker

    I have been getting some emails from concerned/confused parents about how I am taking child care deductions on my income taxes.

    My response is:

    Thanks for your email, appreciate it! I probably didn’t phrase things as well as I could have, but all my deductions are vetted through my extremely thorough accountant.

    I am not sure what you are referring to regarding the Dependent Care section. It looks like that section only applies to W-2 wage earners or sole proprietors, NOT owners of single-member LLCs who receive 1099 income. This is not a nanny tax situation for the simple reason that I don’t have a nanny; my kids attend daycare, preschool & kindergarten, summer camp and child classes. My accountant was very clear that all of the listed items are deductible except for kindergarten because schooling from kindergarten and up is available free of charge through the government.

    Each year, I get the EIN numbers for all of the organizations my kids partook in during the calendar year (daycare, preschool, summer camp & child classes) and give them to my accountant along with records of the payments I made. This is how she verifies their legitimacy and deducts the expenses directly from my consulting income on schedule C. This is ONLY applicable to 1099 income registered on schedule C; I would not be able to take this as an itemized deduction if I were a W-2 wage earner.

    My accountant is extremely thorough, so I am sure if there was an issue with my deductions she would have raised it by now.

    Hope this helps!

    Kathy

    • Can please tell me who is your accountant or any authentic source of finding good accountants?

      • Kathy Zucker

        Just sent you email, good luck with your taxes!

  2. Hi! I just read your article and would also love to get the name of your accountant! My husband and I are looking for a good accountant. Thanks!!

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