For the self-employed, tax time can turn you into a bundle of nerves. You don’t receive w-2s from the companies you work for, and simply file a tax return. As a business owner, you must navigate complex tax scenarios that can be tricky. But with my five tax preparation tips, you can make tax preparation much more manageable.
1. Keep Accurate Records
Keeping accurate records is one of the most important things you can do as a business owner. You will end each year with a clear and accurate picture of your finances if you keep accurate records tracking your income and expenses.
There are several tools that you can use in the process of bookkeeping. This can be as simple as a spreadsheet or journal or more complex software that you will have to take the time to learn. Or you can hire a bookkeeper that will free up your time to concentrate on your business.
No matter how you go, the goal is to keep a consistent set of up-to-date and accurate books that will can be utilized come tax time. This will make things much easier for yourself and your tax preparer when tax season begins.
2. Know Your Deductions
Being self-employed comes with many tax deductions that you may be eligible for that will lead to lower taxability. Some of those more common deductions for the self-employed small business owner include:
- Home Office Expenses: Working from home may entitle you to deduct a portion of your mortgage interest or rent, utilities, and more.
- Business Expenses: Equipment, supplies, and even some travel expenses incurred while running your business may be deductible.
- Retirement Contributions: You may also be able to deduct contributions you make to plans like independent 401(k), and SEP-IRA retirement plans.
- Health Insurance: When you pay for your health insurance, those premiums can be tax deductible.
Knowing which deductions you’re eligible for ensures that you can take advantage of them at tax time.
3. Set Aside Money for Taxes
One of the most common mistakes self-employed individuals make is failing to plan so that they can pay their taxes. Because you don’t have a paycheck or an employer withholding taxes from it, you’re responsible for making those payments.
This is made easier by making estimated tax payments throughout the year to avoid a huge tax bill when your taxes are filed. Setting aside or making estimated payments equal to 25-30% of your business income is a good practice.
4. Don’t Forget About Self-Employment Taxes
As a self-employed individual, you are also responsible for paying self-employment taxes. These taxes are withholdings that go toward Social Security and Medicare. They are calculated based on your net income from self-employment.
The self-employment tax rate is 15.3% for the 2022-2023 tax years. This is higher than the 12.4% paid by employees and their employers equally. But, you may be able to deduct up to 50% of that self-employment taxes when you file your annual tax return.
Don’t get caught off guard! Make sure to take this into account during your financial planning.
5. Hire a Professional
Do not hesitate to hire a professional if you’re overwhelmed or prefer to have it done for you. Tax professionals are there to help you navigate the complicated tax code while taking advantage of all the tax deductions and tax credits available to you.
Tax professionals come in different shapes and sizes, like everything in life, including accountants, enrolled agents, tax attorneys, and tax preparers. Make sure you choose a professional with experience working with self-employed individuals who can help you maximize your tax savings.
A tax professional can help you to have peace of mind. You will know that your tax return is accurate and that you’re not overlooking any crucial deductions or credits.
In conclusion, tax preparation can seem to be an impossible task for the self-employed individual. But with proper planning, it doesn’t have to be. By keeping consistent and accurate records, knowing your deductions, setting aside money for taxes, understanding self-employment taxes, and hiring a professional, you can confidently navigate the tax code and save money on your tax bill.
Remember, starting early and staying organized are key to successful tax preparation. Don’t wait until the last minute to gather your records and file your taxes. By starting early, staying consistent, and following these tips, you can make tax season a breeze and focus on what you do best – running your business.