If you’re self-employed, do these 6 things to make tax time better
It’s tax time and if you’re self-employed you’re probably realizing that there are things you could be doing to save money or make your life easier. Or maybe you’ve left yourself vulnerable to paying unnecessary penalties or interest related to taxes on your earnings. Use our quick list as a cheat sheet to help you do the right things throughout the year and save time and money next April.
1. Determine the Structure for Your Business
When it comes to structure, business owners have a lot of options for how they want to define themselves. The choice they make in this area is important. It has a significant impact on how the organization will be run and how it’s profits will be taxed and should fall into one of two categories:
Sole proprietorship: If you’re working on your own and your business is smaller, you’re likely going to define yourself as a sole proprietor using a schedule C tax form. It’s a straightforward option, but you’ll likely be responsible for a host of self-employment taxes including Social Security and Medicare payments.
Partnership options: If you’re going into business with some else, you’ve got a partnership. You’ll likely have to make a choice between the state designated corporate structures of an LLC (Limited Liability Corporation) that is further defined as an S-Corporation or C-Corporation. These get more complicated, can require a separate tax filing and necessitate a more involved reporting structure that includes establishing a board of directors. Each entity also comes with its own set of tax benefits and eligible deductions.
As you’re reviewing your options, if you have any questions don’t hesitate to ask for the advice. An accountant or another small business expert you trust can point you in the right direction.
2. Register your business
Once you’re clear on the type of corporate structure you’ll have, the next step you’ll need to take is to register your business through your Secretary of State’s office and file for a Federal Tax ID number. This doesn’t cost a lot, but fees vary by where you’re located. You’ll also need this as part of your tax process and so you can provide customers the documentation they need for them to pay your invoices.
3. Plan to prepay your taxes
If you’re a sole proprietor and you anticipate that you’ll pay $1,000 or more in taxes, or a corporation expected to pay $500 in taxes, you’ll need to pay quarterly throughout the year with estimated tax payments. Be sure to pay them on time. If they’re late, you can be charged interest and penalties from the IRS.
As you receive payments from your customers, it is a good idea to get in the habit of setting aside money to pay them when their due. This can be especially new for individuals used to getting a payment from their employer and spending the whole check. However, if you don’t set aside tax money, you may find yourself scrambling for ways to figure out how to pay the bill when it is due.
4. Understand tax deductions you’re entitled to
As you start working your business, it can be good to get an idea of what kind of tax deductions you’re entitled to. Do you have an established home office? That counts. Use of phones, computer, and office equipment can count too. Same goes for the purchase and maintenance costs of an automobile that is designated for your business, mileage while you’re driving, rent for your business space and any charitable gifts your organization makes to qualified organizations.
If your business has employees, the possibilities for deductions will increase. Salary, wages, contract labor costs, employee bonuses, and even holiday party expenses can count if they meet predefined IRS criteria.
5. Organize your paperwork
Once you understand your tax deductions you’ll want to find an easy way to manage your paperwork so its neat, organized, and can be used to answer questions quickly at tax time. You’ll also need a good system to track mileage, invoices, and other business equipment.
There are plenty of tools that make paperwork easier. Lots of computer programs, like Quickbooks or Mint, can help organize budgeting and invoicing, track expenses, and make and accept payments. There are also related smartphone apps that offer mobile payment options and mileage tracking. The right online software, can adapt over time and grow with your business.
Keeping your paperwork clear can save time at tax time but it also has other benefits. It will help you understand cash flow and make better decisions throughout the year that will grow your business. Also, if you don’t keep things organized all year long, come 1Q of the new year, the extra effort you have to put into tax prep may keep you from focusing on your customers as much as you’d like.
6. Plan for retirement
While planning for your retirement is always a financially savvy move, it can have extra benefits for cost-conscious small business owners. The amount of money saved into the right retirement plan isn’t subject to taxes. This money can be substantial — up to $5,500 if your under 50 and $6,500 if you’re over 50.
Strategies will pay off
These strategies may seem like a lot to start off with but they can help you more than you’d realize. Small business owners are often tight on time and money, but these tips can give you more of both. They’ll also help you grow your business and strengthen your skills as an owner. Give them a try today.