Thursday, March 23, 2017

7 Secrets To Help The Self-Employed Reduce Their Tax Bill

official USA tax form shutterstock

by Brian Ashcraft, Director of Tax Compliance, Liberty Tax Service

Taxes can be complicated for most of us, but for the self-employed, they can get especially tricky. You need to know your business status, such as sole proprietor/independent contractor instead of an employee. For example, is your business really a business and not a hobby (Clue: Did it make a profit?).

These are things your tax professional can help you with, but before you head to his or her office, here are a few tips that can help you reduce your tax bill at tax time:

Make Quarterly Estimated Tax Payments.

When you’re working for yourself, nobody takes out Social Security and Medicare taxes from your income. Still, you’re responsible to pay those taxes, also called Self-Employment Tax. The best way to handle this is to pay your tax bill quarterly instead of one, huge chunk at tax time, this will help stop penalties for underpayment.

Take the Home Office Deduction.

Your home is your workplace often when you’re self-employed. If you use your home regularly and exclusively for business, you may be able to take a home office deduction. You may also be able to deduct business use of your home for things like mortgage interest, insurance, utilities, repairs and depreciation. The expenses that benefit only the business part of your home are 100% deductible. Another way is to use the simplified method. And remember the space must be used exclusively for the business.

Don’t Drive Without a Mileage Log.

Your car is your business transportation, so make sure you get the deduction you’re entitled to receive. Some business owners go the quick route; they take the standard mileage rate (53.5 cents per mile for 2017). That makes the math easy because you just need to multiply miles driven for business by the mileage rate. But the IRS also gives you the option of calculating actual costs of using your vehicle. These include gas/oil, insurance, licenses, registration and more. When you add them all up, the actual costs may give you a bigger deduction. Whichever method you use, you can also deduct work-related parking and garage fees and tolls.

Think “Ordinary and Necessary”.

If you’re puzzling over whether an expense is deductible, just think these two words: ordinary and necessary. To be deductible, a business expense must be ordinary, or common and accepted in your field of business. It must also be necessary, or helpful and appropriate for your trade or business. Expenses that pass this test may very well qualify as deductions.

Stay Healthy.

Unless and until the health care law changes, your self-employed health insurance premiums for medical and qualified long-term care are 100% deductible as an adjustment to income. To qualify, you must pay the premiums to a plan established under your business, and your business profit must equal or exceed the insurance amount.

Keep Great Records.

For some people, this is easier said than done. For the self-employed, it’s crucial. You have to separate business records from personal records, and you have to keep good records of your income and expenses. There’s plenty of software out there to help you keep track of things, but you can also do it the old-fashioned way – keep receipts and other paperwork in a file marked “business stuff.” Things you’ll want to keep include:

  • Each order form
  • Packing slip/invoice received with goods shipped to you
  • Personal use records
  • Copies of money orders, checks, credit card receipts for purchases
  • Income advisory statement
  • Monthly statements
  • Bank deposits and statements
  • Miscellaneous receipts

Get Professional Help.

Like we said at the start, business taxes are complex. It’s best to find someone who understands taxes and how they apply to your business situation instead of trying to determine the ins and outs of the system by yourself. After all, you don’t want to put your business in jeopardy because you made a tax mistake.

 

brian ashcraft

Brian Ashcraft is Director of Tax Compliance for Liberty Tax Service, one of the fastest-growing tax preparation franchises. Brian is responsible for developing systems and processes to help franchisees and their tax preparers meet rigorous compliance standards. He works with company leaders and with independent owners at franchise locations across the United States and Canada, reviewing processes in place and setting benchmarks for compliance success.



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1 comment:

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