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Taxes. They’re a hassle, but like death, unavoidable. For freelancers, contractors and home business owners, tax time can be a bit more stressful. But no worries; these experts have shared their tips on how to keep track, organize, and hopefully make tax season an easier experience for you. Got any tips of your own? Add them to the comments!
Set up a pass-through entity such as an LLC many work at home business owners use a schedule C to report their business income and expenses. These individuals could be missing out on a valuable tax deduction. The Tax Cuts and Jobs Act (GOP tax bill) created a new tax deduction for owners of pass-through entities. Pass-through owners who qualify can deduct up to 20% of their net business income from their taxable income.
Fund an Health savings account; an HSA allows individuals to contribute the amount of their health care deductible to a savings account and receive an income tax deduction. The funds can be withdrawn income tax-free to pay for qualifying medicals expenses. Money left over at the end of the year can remain in the account and be used in retirement similar to an IRA or 401k.
A trend over the last several years has been for freelancers to skip traditional health insurance and replace it with healthcare sharing ministries. These plans are not eligible for an HSA and are not tax deductible for the business. Freelancers need to compare the nets costs of being able to deduct traditional insurance and an HSA, compared to the total cost of a healthcare ministry plan. Many times the former can be less expensive with stronger coverage.
1) If able, set-up a retirement account to defer income (SIMPLE or a Roth IRA are very easy to do).
2) Consider taking some salary to accrue Social Security Credits (this is a forced savings plan).
3) Don’t forget to deduct mileage as a business expense (Every bit helps).
*Be Reasonable About What You Write Off*
A lot of small business owners can get aggressive about writing off business expenses, but keep this maxim in mind when you think about how the IRS will view your shenanigans: Pigs get fat, but hogs get slaughtered. Identifying and claiming your true expenses (like mileage, use of a home office, computer equipment, etc.) is a great way to trim down that tax bill. But if you start to get greedy by writing off personal expenses, you could end up really paying for it down the road.
1. Find an easy tool to track and compile your tax related transactions.
2. Whether you own or rent, become a near expert on the home office deduction. Then get out your tape measure and make sure you get every square foot of benefit, especially if you live in an area with high housing costs.
3. Know that being self-employed and residing in a suburb with high housing costs puts you in a demographic that has a higher rate of tax cheaters, and therefore a higher chance of being audited. You need to always be prepared for an audit by having an impeccable paper trail and knowing when to get the help of a tax expert.
Independent entrepreneurs should make it a habit to track revenue and expenses on a weekly or monthly basis. Organize this information into a spreadsheet and come tax season, this small effort will pay off greatly. I’d also recommend educating yourself on home based tax deductions to take advantage of. Internet and phone bills for example can be written off.
When it comes to tax tips for the work at home entrepreneur, I have three in mind:
1. Don’t be afraid to take the home office deduction. Some people think that this is a red flag for audits, but if you use an office regularly and exclusively for business, then you deserve the deduction.
2. Keep track of all your business expenses. Don’t let a deduction go to
3. Get a receipt scanner so you can digitize your receipts and store them on your computer. This will save so much time and space, but forget to back everything up and keep it for seven years.
Your home is your castle, and in this case it may also be your office! As such, you may eligible for a deduction in taxes, based on the size of your home. Look into it, but consult with your accountant before filing anything, as it may have unexpected side-effects.
Depending on your business, you can file for deductions on many things: health, education, and supplies. If you are not sure of what you are eligible for, consult your financial planner or accountant. Many times, such deductions occur on a month-by-month basis, as opposed to an annual one. All the more reason to keep your finger on the pulse, and not try to cut corners.
Keep things completely separate, or else you are in for a world of trouble. This is crucial, since it will not only help you save money, but it will also keep you on the good side of any authorities. When you file your taxes, you need to prepare in such a way that won’t raise any red flags. Keeping your accounts separate may seem obvious, but it also needs to be rigidly followed.