Tax Saving Tips for Self-Employed
Starting your own business doesn’t require you to be a whiz when it comes to taxes. However, understanding filing hacks and tax relief a self-employed individual could take advantage of will certainly help you stay organized, save money, and cut your tax bill during income tax return filing.
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7 Helpful Tax Saving Strategies for Self-Employed Individuals
Many businesses lose a big chunk of money every year due to inefficient and wrong tax planning and execution. Indeed, every penny counts. So for you to maximize your profit and reduce your tax bill, scroll through these crucial tax-saving tips for self-employed individuals.
1. Invest in an efficient tax software
Honestly speaking, who would want to prepare taxes through paper nowadays? No one. Convenient tax planning software is now a must for self-employed individuals, especially because some can’t afford professional services to help them through the filing process.
Using top-rated tax software like H&R Block or TurboTax will make preparing and filing a self-assessment tax return online much easier! IRS has reported online tax return errors at below 1% only. This is a huge backward leap from the 21% reported errors when filing paper returns.
2. Keep track of business-related expenditures
Thanks to technology, following your spending as a self-employed individual is now more effortless than ever, but it can still be heavy for some. Most credit cards nowadays provide a full-year review of your expenses, and all bank transactions are also made available online for convenient tracking. While online banking gives leeway for easier tracing, you could still miss plenty of things along the line.
That is why it’s crucial to make use of software like Quicken or Quickbooks so you can have multiple means to record all deductible expenses. Using these kinds of digital tax apps to track all of your expenditures throughout the year is more acceptable and less painful than manually organizing tons of receipts all at once (not to mention the time it will consume).
Make sure to connect your bank accounts and credit cards to the software you’re using to include the amounts from these accounts in your total running expenditure. Doing so will allow you to keep track of all the spending and quickly produce a report with a few clicks.
3. Deduct Office Space
Self-employed people usually use at least a room to serve as an office in their home. In line with this, you can deduct the percentage of the house you’re exclusively using for business purposes. It also applies to your utilities, such as internet connection and phone. So if you have a phone that you’re using to take business calls, your monthly phone bills are considered part of deductible expenses.
According to IRS Publication 587, the space where you work should be used “exclusively and regularly” as the principal place of business where you transact with clients or customers during the ordinary course of business.
4. Prioritize your retirement accounts
There are a lot of retirement planning options for self-employed individuals. You can still have access to a Traditional Individual Retirement Account (IRA), which has an annual contribution cap of $5,500.
This kind of IRA can be combined with retirement plans like Simplified Employee Pension (SEP) IRA or 401(k), thereby allowing you to contribute up to $55,000 per year. If you’re over 50 years of age, contribution limits are much higher. Combine 401(k) with a Cash Balance Pension Plan, and you may contribute up to $150,000 annually.
Fortunately, you can claim tax relief through retirement subscriptions. The contributions in the mentioned plans above can be used as a deduction to your taxable income.
5. Take advantage of your auto expenses
Auto expenses tied to business are considered allowable expenses (deductible) that can lower your tax bill. The percentage of your car’s mileage attributable to business will determine the deduction you can get from your total auto expenses.
The Tax Code provides two calculations for the said deduction. First, track your actual auto expenses, then deduct the usage percentage referable to business premises. Second, you can trace your actual mileage and compute tax deductions for total miles travelled for business purposes.
Tracking might consume your time but keep in mind the extra money you could deduct from your income tax bill once you complete the calculations. It will be all worth it!
6. Get the most out of carryover tax deductions
Instead of becoming demotivated because you incur a net operating loss or a capital loss, revamp your business and take advantage of these losses. Just in case you’re not familiar with the carryover procedure, losses from the previous tax year may be carried over and used as tax deductions for the upcoming years.
Carryovers also apply to home office deductions and even a large charitable donation. Keep track of these carryovers and enjoy lower future tax bills!
7. Seek professional help
Since taxes get more complicated, especially when you’re self-employed, hiring a tax professional might be the best decision you’d ever make. A tax specialist would be a great help in identifying expenses you’re not aware you could write off. Thus, the money you can save due to professional advice may already be a payment for the service fee of that person. Double win!
If you’re considering hiring a tax preparer, you better make calls now. These professionals tend to book up as the filing season moves along. If you don’t hurry, you either file your income tax return by yourself or get stuck paying someone who demands higher fees.
Conclusion
Being a self-employed individual is already hard enough without the need to stress about filing your taxes. Do yourself a favour. Get professional help and let tax assessment software do most of the heavy lifting while you’re focusing on how to earn more money. Make sure to keep in mind these vital tax-saving tips and enjoy a smooth sailing tax season (with a lower tax bill)!
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