SELF-EMPLOYED WEALTH One of the greatest strategies of all for financial success is a successful business. If your business is profitable, that equity is the key to big money. In fact, the miracle of equity is that it builds itself. All you have to do is reinvest the profits successfully, and the value of the entity that made them will increase accordingly. And even if your business never becomes profitable, it can help cut your tax bill. Even if it never grows larger than a tiny "small" business, it can mean the difference between financial independence and life as a wage slave. The 1986 tax reforms rubbed off some of the shine, but a small business is still one of the best tax shelters. And, contrary to what you may have thought, starting your own enterprise doesn't require a radical departure from your current income. There are two ways you can profit from business ownership while, in effect, keeping your present job: independent contracting and a sideline business. A business of your own will help you realize a dream of financial independence. To succeed all you need is a motivation to succeed, some no-nonsense planning, a competitive spirit, and the energy to achieve your goals. In addition to equity, the most important component of self-employed wealth is that you are able to deduct many of your expenses. A regular corporation allows you to turn many items you might normally buy out of your own pocket with after-tax dollars into deductible expenses by making them tax-free fringe benefits the business provides for its employee -- you. You don't need to have any other employees to take advantage of incorporating. If you do have employees, the tax treatment of employee benefits is another advantage of incorporating your business. Tax rules recognize two general types of fringe benefits: those that are identified specifically, and those that fall into broader categories. Specific benefit plans that are tax-free to employees and deductible by the employer are: * Accident and health insurance plans * Group-term life insurance up to $50,000 * Prepaid legal services * Cafeteria or flexible-benefit plans * Vanpooling * Scholarships and fellowships * Dependent care assistance * Education assistance related to the employee's job Let's look at health insurance as an example of the advantage of incorporating. Many people who leave an employer to go out on their own are shocked by the health premium they have to pay on their own. A family plan with comprehensive coverage and dental benefits could cost you $400 a month or more. By incorporating, you can have your company provide your insurance and deduct it as a business expense. And the benefit does not count as income for your individual tax purposes. The restrictions on these plans require that the benefits be available to a reasonable cross section of employees, as defined by various mathematical formulas in the tax code and IRS regulations. Benefits will not be tax-free if they are available only to officers or highly compensated employees. Obviously, this does not present a real problem to the one-employee corporation. You must draft your benefit plans so that if you do hire permanent full- time employees in the future, they will be eligible for benefits. For small-corporation employees, one of the biggest of these benefits is tax-deductible life insurance. The most common way to get tax-deductible life insurance is through a group term insurance plan. An employee receives the first $50,000 of coverage tax- free and must include as income only a percentage of the premium attributable to coverage over $50,000. The taxable amount is determined by consulting an IRS table. The coverage for each employee must be provided using a formula that takes account of factors such as age, years of service, compensation, and position in the company. The employer must own the policy. A drawback to these plans is that coverage usually ends when an employee retires, and some retired employees continue to need life insurance. Coverage for retired employees is very expensive. When you own a business you may be able to... * turn "personal" expenses into tax-deductible dollars * split income among family members to avoid the effects of progressive tax rates * have the business pay you in tax-free fringe benefits instead of a taxable salary * deduct your vacation costs, under certain conditions * write off your home office But be sure to... * weigh the costs of going it alone * appear independent * keep good business records * follow closely the rules on employing family members * consult experts before setting up complex benefit plans * pay your estimated taxes each quarter General benefits Broad groups of benefits that receive tax advantages include the following: * No-additional-cost services are tax-free when provided by the employer (or another business under a reciprocal agreement with the employer), and the employer does not incur a substantial cost (including foregone revenue) in providing them. An example might be allowing your waiters to have free lunches at your restaurant. The service must be provided by the same line of business in which the employee works. * Qualified employee discounts are tax-free when the discounts do not exceed the employer's gross profit margin on the product. Discounts on services cannot exceed 20% of the price charged to other customers. Employee discounts must be from the line of business in which the employee works. * Working condition fringes are property or services that would be deductible trade or business expenses if the employee paid for them himself. Parking on or near the business premises is considered a working condition fringe benefit under the new law. The employer can deduct it, and the employee needn't count it as taxable income. * De minimis fringes are tax-free if their value is so small that accounting for the benefits is unreasonable or impractical. Typing a personal letter, cocktail parties, picnics, and holiday gifts are de minimis fringes. Personal use of a copying machine is tax-free if the employer can show that 85% of the machine's use is for business.