Being your own boss is awesome, but it often comes with a lot more responsibility than being an employee. Keeping record of your finances throughout the year is crucial, and it can become tiresome being forced to dig through boxes of files to get organized for your tax filings. It is best to stay organized throughout the year and to frequently analyze your taxes so that you can make necessary adjustments during the year that will be the most beneficial to your business.
However, there are some tax benefits to being self-employed. Employees are generally limited or prohibited from deducting certain business-related expenses, but self-employed individuals can deduct all of their business-related expenses that could be substantiated. These deductions can even reduce the amount of social security and Medicare taxes that a self-employed person pays.
The following self-employment tax suggestions should make the next tax season a painless one, while also allowing you to take advantage of all the benefits that come along with being your own boss.
Firstly, before you attempt to do anything else, you must assess where you currently stand regarding your taxes. For example, it would not be wise to make expenditures in a year in which you do not require the deduction.
If you’re anticipating that you will move into a higher tax bracket this year or the following year, it’s a good idea to take the highest number of deductions possible in the year that you are subject to the highest tax rate. Without adequately forecasting and calculating the net profit of your business, you’re just playing the guessing game.
You cannot simply delay receiving your income by just not cashing checks that you have received. Income in general is typically taxed when it is accessible to you (assuming that your business uses the cash accounting method).
Nonetheless, you can be strategic and time your billing process in a way that causes your clients to pay you in the year that is most beneficial for you. This can be done by delaying sending a bill to a client or offering a small discount if the client pays a bill early.
The end of a tax year is a great time to think strategically about purchases for your business. You can advance or delay a purchase to ensure that the purchase will be deductible in the year that will provide you with the most tax benefit.
If you purchase new business assets on or before December 31st, you can begin to depreciate those assets this tax season. You may even be able to use what is called a Section 179 Deduction and expense the total price of an asset within one year, instead of having to depreciate the expense over multiple tax years.
Typically, business-related expenditures are counted as made within the same year that you have purchased them. By using a credit card, you may be able to deduct an expense this year, but not have to pay for it until the next tax year. You can also strategize when to make a payment if you want the expense to be on a specific tax year. For example, you might pay a utility bill at the end of December instead of at the beginning of January if the deduction is more valuable for your business in the current year.
Some Taxpayers are also trying to use this strategy with inventory, but inventory is not deductible when purchased and instead is deductible once the inventory is sold. Therefore, you will not receive significant tax benefits by purchasing a large amount of inventory at the end of a tax year.
If you are self-employed, you can deduct health insurance premiums for you, your spouse, and your dependents. You are also able to deduct long-term care insurance premiums. By claiming these tax deductions, you may be able to significantly reduce your tax liability. These types of insurance expenses are deductible even if the insurance is under your personal name and not in the name of your business.
Sometimes a business should be organized as a corporation or partnership. However, unless there are some tax or legal benefit to operating as a corporation or partnership, it is often best to keep your tax filing simple by operating your business as a self-employed individual or doing business as (DBA) and filing a Schedule C. It is the easiest way to file, however there may be benefits to a different type of entity. You should consult with a tax attorney at Coast One Tax Group to determine the best entity type for your business.