Tax Tips For Self-Employed Individuals: Getting Your Year Started


Self-Employed man on phone
Tax Tips For Self-Employed Individuals


It’s that time of year again. I’m not talking about tax planning for the previous year, I’m talking about tax planning for the current year. I have spent my fair share of time talking to many veteran and newly converted self-employed individuals and have heard the all too common grumblings towards the “Tax Man.” Hey, I’m with you all. As a solo practitioner, I want to keep as much of my own money in my pocket without Uncle Sam protesting that I’m keeping too much. So I thought I’d give my fellow self-employed friends and contract workers a few tax tips that could help you get your year on the right track.


Set up and Contribute to a Health Savings Accounts (HSA)


Healthcare is confusing! You have your HMOs, PPOs, HRAs, and HDHPs; some of you may be reading this and thinking, “what in the world are these?” For the sake of not boring you to death on this blog, I’ll limit this portion to what you need to know. A Health Savings Account (HSA) CAN ONLY be used in conjunction with a High Deductible Health Plan (HDHP). Ideally, you want to use this if you’re the type of person that rarely gets sick, visits the doctor a few times a year, you know… in good health.


The Benefit: When you contribute to a Health Savings Account, you not only sidestep federal income tax, you also sidestep payroll tax which is 15.3% of your net business income. So if you’re in the 25% marginal tax bracket, you could save up to 40.3%! (Contribution Limits Apply Of Course) The added bonus to using HSA funds is that they’re tax-free when used for qualified medical expenses and if you save enough, you can even invest the funds to keep up with the rising cost of healthcare!


Set up and Contribute to a Retirement Plan


This tip is a no-brainer. I usually get asked by small business owners that have had a good year, “what should I do with my extra money?” Do your future self a favor, save some of it. Forgo the extravagant vacation, the hunting/fishing trips, and/or shopping spree. As much as some of us love what we do, we can’t work forever. Retirement accounts also come in different shapes and sizes so be sure to talk to an investment adviser to see which one best suits you.


The Benefit: Depending on the retirement account, you can defer some taxes on the amount you contribute and let it grow tax-deferred as well. Ideally, when you receive the distribution of these funds, you will be in a lower tax bracket because you’ve retired ultimately paying lower taxes on these funds. There is a benefit to paying taxes on some contributions, but that’s for another article.

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Standard Mileage vs. Actual Expense


Have a car and use it for business? Then you have a business expense on your hands that reduces your tax bill. If you’re a veteran self-employed person, you’ve probably wrestled with this one, or at least your CPA has. If you’re new to contract work, then you may want to know the difference. Here it goes. If you use your car for business, the IRS allows you to take the actual expenses you pay for things such as gas, oil, maintenance & repairs, tires, insurance, depreciation, etc… OR the standard mileage rate which varies from year to year. Which one should you use? It depends. If you drove a lot this year (excluding home-to-office commute) to perform services, you may be better off taking the standard mileage rate. If you had more expenses, then the actual expenses may be beneficial. Either one you choose, you will need to keep good records of mileage and/or expenses. **Additionally, if you want to use the standard mileage method, YOU MUST USE THIS METHOD IN THE FIRST YEAR YOU USE YOUR CAR FOR BUSINESS. You can switch back and forth between methods later.


The Benefit: As a business expense, deducting mileage or actual expense reduces your business income which in turn reduces the amount of self-employment taxes and federal taxes you need to pay.


Home Office Deduction


The home office depreciation deduction is one of the most common deductions for small business owners. After all, home is where it all starts for most of us. The IRS has some very strict rules on exclusivity when using part of your home as a deductible expense. I won’t bore you with them here but there is an added benefit to claiming the home office deduction. You get to deduct part of your utility bills that keep your office running as well.


The Benefit: Much like the vehicle expense deduction mentioned above, your home office and the portion you deduct for utilities reduces your business income which in turn reduces your self-employment taxes and federal taxes you need to pay.


Save Your Receipts


Good recordkeeping is key to not driving your CPA or Enrolled Agent nuts and keeping the IRS off your back. Whether you are new or are a veteran entrepreneur, set a schedule daily, weekly, or monthly to scan all your receipts and categorize them. I’m a big fan of being paperless. I remember the days my father kept his archives in those metal filing cabinets. Before we knew it, we had to section off a part of our living space for them. The IRS has given some guidance on how long you should keep documents, 3-7 years, depending on if you are claiming a deduction or loss for your business.


The Benefit: You keep your CPA, Enrolled Agent, and the IRS happy; they’re all important if you’re an entrepreneur.


Set up an account with a Bookkeeping/Accounting software


This is crucial to all self-employed individuals. Having an accounting/bookkeeping software that can track what you contribute into an HSA, a retirement account, and that can track deductible expenses will make your life a lot easier come tax time. If not yours, your tax preparer will definitely appreciate you for it and not fire you as a client. There are many software programs that can help you track your income and expenses. I’m a fan of Quickbooks, Gusto, and Wave Accounting software. If you just started contract work, it would be wise to hire a tax professional to help you set up your bookkeeping/accounting software.


The Benefit: Your and your tax preparer can save a ton of time by not having to reconcile paper receipts. Just connect your business account(s) to the software and let technology do the work of tracking.


Seek Out a Tax Professional


The most important tax tip for EVERY self-employed individual or contract worker is to seek out professional tax help. You are good at what you do and if your core business is not preparing taxes or bookkeeping, outsource it. While looking for a tax professional, don’t be afraid to ask about their experience, specialties, how they bill, and if they will be your point of contact. It’s important to have The Right tax professional, not just a tax professional.


The Benefit: You will maximize your business’s tax deductions, SAVE A TON OF TIME, and have peace of mind that they’re done correctly.



 

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MyLife Financial is a fee-only, virtual financial advisor providing objective and independent advice. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.


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