It’s that time of year again! Most of the American workforce know April 15th as “Tax Day.” But for self-employed professionals and business owners, April 15th is just one of four times a year when you need to file your taxes. And that’s not the only difference when it comes to taxes for the self-employed.
If you are your own boss, make sure you follow these five essential tax tips for self-employed professionals and small business owners.
1. Know your responsibilities
As an independent worker or small business, you are no longer responsible for the same income tax that traditional employees owe. Instead, you owe self-employment tax, which is a larger burden since you don’t have an employer who evenly shares the cost of Social Security and Medicare with you. But the good news is you can claim 50% of what you pay in self-employment tax as an income tax deduction. If, for example, you pay $2,000 for self-employment tax, you can deduct $1,000 from your income tax. Just remember that your overall savings from the deduction will depend on your income tax bracket.
2. Take advantage of business deductions
Speaking of deductions, here’s some good news: Unlike a traditional employee, as an independent worker or small business owner, you can take deductions to cover your business expenses and lower your tax burden. What qualifies as a deduction? You might be surprised at how much you can write off! Some common expenses include office space (including a home office), transportation, supplies and meals. But there are also more specific deductions you can take depending on your industry. We recommend reviewing this list of self-employed expenses and tax deductions from our partner QuickBooks.
3. Organize your documents
When you work for yourself or run your own business, it’s important to keep accurate financial records all year round in order to measure how well you are performing. But these records are especially critical for tax filing. Here are the key records and documents to have handy:
- All receipts for the business expenses you plan to deduct
- Bills that relate to your office/home office deduction (mortgage or rent statements, utility bills, etc).
- The relevant 1099 forms: There are 15 types of 1099 forms but the two most relevant to the self-employed or business owner income is the 1099-MISC and 1099-K.
4. Consider Hiring a Tax Pro
There are tons of tax filing solutions that help self-employed professionals and small business owners file on their own. But keep in mind that even with easy-to-use software, self-employment taxes are much more involved than traditional taxes. In order to avoid costly mistakes or—worst-case scenario—an audit, it’s wise to invest in a tax professional who specializes in small business and self-employment tax codes. While you can save money using a tax preparation software, it might not be optimized to calculate the deductions or benefits eligible to you. On the other hand, a tax advisor who specializes in self-employment will make sure you reap the maximum benefits. In the long run, the investment in a pro will pay off.
5. Save for your future
Here’s some final good news to close with: Saving for your future can result in a tax break! You can reduce your taxable income by putting additional money toward a traditional retirement account; those savings will not be taxed until you withdraw the fund in retirement. Small business owners under the age of 50 can contribute up to $5,500 to a traditional or Roth IRA, while those 50 and older can put up to $6,500 toward their retirement savings. So now is the time to start saving for your golden years.