The life of an entrepreneur is often much more desirable than the typical career path: you get to do work you enjoy, set your own hours, and choose your own clients. But there is one area where employees have an advantage over those who are self employed: taxes.
Individuals working as an employee automatically have taxes withheld from their paychecks, and nearly 80 percent of them receive a tax refund. But when you’re self employed, those tax payments are your responsibility, and that means your days of getting refunds are over.
Fortunately, there are ways you can lower your tax bill. If you own a small business, if you’re a freelancer, or even if you just have a side gig, the following tax tips will help you save money when it comes time to file.
The best self-employment tax advice
The number-one piece of tax advice for entrepreneurs or freelancers is to begin your taxes early. If you wait until the last minute, you may find yourself scrambling to get all of the necessary paperwork together. And even if you file an extension, that doesn’t give you more time to make your payment — you still have to make an estimated tax payment by April 15th.
Do your best throughout the year to carefully track your expenses and earnings. Keep both digital copies and paper copies if possible, so you have a backup in the event of a computer crash or other unforeseen event. Having a separate business bank account and credit card will also make it easier to keep track of business expenses.
Claim all your deductions
Claiming all allowable deductions is integral to reducing your tax bill, as deductions essentially reduce the total amount of your taxable income.
Numerous deductions are available to self-employed individuals, including a home office, conferences, work-related travel, online courses, and any office supplies. If you work from home, you may also be able to deduct a portion of utilities that are shared by both the home and the business.
Just make sure you keep receipts and meticulous records, as claiming a lot of deductions — especially if your business didn’t make very much money — could draw unwanted attention from the IRS.
Taxes supersede savings
This tip is more of a mentality to adopt as a self-employed individual: Taxes are more important than savings.
Make taxes a priority, and consider opening a savings account dedicated to money for taxes. Not only will this make them easier to pay when the time comes, but you’ll also earn interest on this money throughout the year. Think of it as deducting money from your paycheck, just as if you had a traditional job. While you’re at it, make sure you’re putting a certain percentage of each paycheck into a retirement account as well.
Reduce net profits
Although most people would never look for ways to reduce their income, one of the best ways to reduce the burden of taxes is to reduce your the amount of your income that’s considered taxable.
Think of strategic ways to reinvest in your business. Hire contractors to handle tasks that you don’t enjoy or that you aren’t good at. You can deduct the contractor’s fees while also freeing up more of your time to focus on your strengths. Even better — hire your kids to perform tasks that are within their skill sets, such as making deliveries or answering the phone. As long as their wages are reasonable for the work performed, you can deduct them, and the income remains in the family!
You could also invest in classes that benefit both your business and yourself personally. For example, if you’ve always been interested in photography, and you need photos for your business, you could invest in a nice camera and take a photography class, and deduct those expenses.
Get professional help
It’s always a good idea for self-employed individuals to work with a licensed tax professional to ensure that their taxes are filed correctly. While someone with a straightforward W-2 may be able to file their own taxes, individuals who are self-employed are more likely to be targeted for an audit if certain red flags appear on their tax return, such as claiming a home office deduction or 100 percent use of an automobile for business purposes. Not only will a licensed tax professional make sure that your tax return is on the level, they can also help you find ways to reduce your taxable income.
Need help with your taxes? VTax is a full-service tax preparation firm, designed to provide customers with a better tax experience. VTax combines concierge-quality service with secure, convenient access to our national network of trained tax professionals and CPAs. Contact us today for your free quote!