At Coffee News®, we believe being your own boss is the best. There are many benefits to becoming an entrepreneur, and the many tax deductions only self-employed people can take is one of them. But there are also taxes that only self-employed people have to pay, so planning ahead is the key to keeping more of your hard-earned money. If you weren’t happy with your tax bill in 2014, now is the time to make changes for 2015. Check out our four favorite tax tips for entrepreneurs below, and talk to your accountant about what you can do now to protect your income in 2015!
1. Paying self-employment taxes on time means paying less.
Self-employment tax is the same tax every worker pays to help fund the Social Security and Medicare programs. The difference is, entrepreneurs take on the responsibility of paying this tax themselves.
Before you started your own business, your employer deducted employment taxes from your salary and paid the I.R.S. for you. If you qualified for a refund when you calculated your taxes for the year, you received some of that money back. Now that you are your own boss, you need to send quarterly estimated tax payments to the I.R.S. on your own. This “pay as you go” method is divided up into four payments during the year that are due on April 15, June 15, September 15 and January 15. You need to pay one quarter of your self-employment tax on each one of those dates, and you will be fined underpayment penalties and interest if you don’t.
You figure out how much you owe in self-employment taxes, and then you should talk to a trusted tax advisor and review the Schedule SE. To avoid underpayment charges, you must owe less than $1,000 in taxes or to have paid at least 90% of the tax you owe when you file. Paying on time is a great way to keep more of your own hard-earned money!
2. Explore potential S-Corp savings, even if you are a sole proprietor.
Even if you form an LLC for your new business, the I.R.S. treats all the money you earn from your business as your personal income—and you have to pay self-employment tax on all of it. If, like many Coffee News® publishers, you make a lot of money from your small business, designating that business as an S Corp might help you shelter some of that income from taxes.
Small business owners who can file as an S Corp pay themselves a “reasonable salary” out of their business profits, and, in most states, only pay self-employment taxes on that salary. S Corp filling does demand a lot of additional paperwork and documentation throughout the year, however, so talk to a trusted tax professional about whether or not it makes sense for you and your small business. It just might significantly lower your personal tax bill while keeping your business in the black!
3. Deductions can make a big difference for self-employed entrepreneurs.
Almost all Coffee News® publishers enjoy the convenience and flexibility of working from their own home. They also enjoy the ability to deduct their home office—and a host of other business expenses—from their income taxes.
Your income taxes are calculated from your “net profit”—the amount of money you make once the costs of running your business are subtracted.
The I.R.S. allows self-employed entrepreneurs to reduce their net profit by deducting the money you spent on running your own business. Some of the deductions might surprise you, like mileage or maintenance on your car, your phone and internet bills, loan interest, computer and software purchases, office supplies, legal or tax preparation fees, and more! If you have a home office, a percentage of your home utilities and home repairs may also be tax-deductible.
(The list of things self-employed people can deduct as business expenses is long, but not infinite, so be responsible and deduct only what you’re due. But if it’s an “ordinary and necessary” part of running your business, chances are, you can deduct it.)
Talk to a trusted tax professional, review the Schedule C, Profit / Loss from a Business and start saving your receipts. By documenting and deducting every possible business expense, you can keep more of your money at tax time!
4. Open your own Self-Employed 401(k), Simple IRA or SEP-IRA.
Entrepreneurs need to save for retirement, too! And self-employed small business owners can save money on their taxes while they save for the future. Just like in traditional jobs, putting money into retirement savings plans like 401(k)s and IRAs (Individual Retirement Accounts) can reduce the amount of taxes entrepreneurs have to pay now. In most cases, you deduct the money you contributed from your income, and you pay taxes on it only when you take that money out.
When you worked for somebody else, they chose the types of retirement savings plans you had access to. Now that you are your own boss, you get to choose—and you might be surprised at how many choices you have. Self-Employed 401(k)s, Simple IRAs, SEP (Self Employed Person) IRAs and more all let you defer or diminish your tax liability in different ways. The best part? Some of these savings plans can be opened just before the filing deadline of April 15.
Because there are so many choices with so many differing benefits and drawbacks, you should definitely talk to a trusted tax professional about the plan that makes the most sense—and saves the most money—for you.