There’s a lot to love about being self-employed. Being your own boss, setting your own hours, and pursuing meaningful work are just a few of the perks. Still, until you got your business up and running, you may not have truly appreciated how much time you would be spending doing those things that seem to have nothing to do with the work that inspired you to open your establishment in the first place. Purchasing ink, logging driving miles, changing a light bulb that’s gone out, fixing the Wi-Fi, researching software tools — the list goes on and on. Unfortunately, the reality is that these administrative items are an essential part of building an enterprise that is profitable if not sustainable. And, becoming a pro at the management and maintenance tasks is a huge factor in your ability to realize key savings and tap into strategies for increased cash flow. One area where you want to be on your game so your business can flourish is filing your taxes.
Here are a few tips and items to keep in mind when you’re working on the books:
- Be organized about records and information. Of course, keeping your records, receipts, invoices, and other details well-organized and up to date makes it easier to file your taxes quickly and correctly when the deadline looms. But it’s a habit worth getting into because it also makes it easier for you to maintain a clear idea of your fixed and variable expenses and your income. You don’t want to miss out on key tax deductions come filing time because you didn’t do a good job keeping track of your expenses and receipts. Those are dollars that reduce what gets taxed, and that’s savings you could easily be missing.
- Know the options available to the self-employed on deferring income to retirement. The other way to reduce what you’re paying in taxes is to take advantage of accounts that are available to the self-employed. Solo 401(k) accounts, in particular, are helpful because you can make contributions to them as both the employer and the employee, so the contribution limits for these accounts are some of the highest available.
- Be mindful of your spouse’s income. Another thing you may not realize is that if you’re self-employed, married, and filing jointly, you need to consider your spouse’s income to determine which tax rate applies to your business. You may need to pay more in taxes because your combined income warrants your business’s place in a higher bracket.
- Keep up with your quarterly estimated tax payments. Failing to make timely quarterly estimated income tax payments is often the biggest and most critical tax problem facing self-employed individuals. Similar in concept to the withholding an employer takes out of someone’s paycheck, although mandatory, self-employed individuals must timely write a check to the IRS quarterly or else face significant IRS, and possibly state, penalties, and interest. Individuals must be disciplined to budget for each estimated tax payment generally due on April 15, June 15, Sept 15, and the following Jan 15. And, if you fall behind, the courts and IRS both agree that IRS is not obligated to grant the client a monthly payment plan on the unpaid taxes—result: enforced collection like levies, bank account seizures, wage levies. While there are a few planning/deferment strategies out there to lower your estimated payments, especially if there is a spouse which works for someone else as a W-2 employee, the general rule is that the sum of your estimated payments must equal if your estimated tax payments equal at least 90% of the actual total that you ended up owing for the year, or at least 100% of the tax you paid on the previous year.
Learning the ins and outs of filing taxes for your business is all a part of the entrepreneurial experience. Still, it can be a lot to manage. If you don’t feel confident about the best option for your retirement savings or how various items affect your filing (such as your spouse’s income), or you just want to make sure you are realizing as much in savings as you possibly can, consult your Wood + Lamping attorney who not only can help you take care of these items, but can make sure your business is protected from legal liability as well.