Self-employment is no different from freelancing where your income comes from being an independent worker. Most of the time, a freelancer or a self-employed person earns a little more than expected especially if the business is currently booming. But unfortunately, this increasing earning is also associated with increasing tax to be paid to the government.
They say that there are two things you can’t avoid in this world: first, death and second, taxes. Yes, even you are self-employed, you must pay your taxes based on your computed tax rate. The tax rate is the percentage of income paid as tax, or the percent of the value of a good, service or asset paid as tax.
Self-Employment Tax Deduction
Self-employment tax or SE tax is the Social Security and Medicare tax paid by self-employed individuals. It is due when an individual has net earnings of $400 or more in self–employment income over the course of the tax year. If you are self-employed, you are paid the full amount you earn. Nothing is deducted from your check so you must make estimated tax payments during the year to pay your self-employment tax and your income tax.
So the point here is since you are your own boss and no longer an employee, you are responsible to pay your own taxes every year. And trying to avoid a huge tax bill can seem impossible. But to tell you, it is not, as there are ways to avoid it.
So if you are currently self-employed and looking for ways how to avoid huge tax bill, this article from Personal Loans Now is for you.
Ways on How to Avoid Huge Tax Bill
Figuring Estimated Payments
Quarterly payment is important to be submitted especially to people who run a small business, freelancers, and independent contractors to keep track of what they are about to pay. Paying estimated quarterly taxes four times per year may seem like a chore. But if you project these quarterly payments correctly, it can actually ease your tax burden come tax time. If you make too much income and don’t pay your quarterly tax payments you will not only get stuck with a large tax bill but could face additional penalties for not paying the tax as you earned the income.
Certain factors have to be considered in making an estimated payment like any divorce settlement or alimony, gambling or any other prizes you received by doing so, and any existing interest. You can send the payment via snail mail or register with EFTS, but the most recommended way on how to pay estimated tax payments is by using the IRS direct pay services.
Save Enough Money
Another wise thing to do in order to avoid the shocking result of a huge tax bill is by saving money ahead of time to pay for your taxes. As a business minded person, you must have the so-called “the rule of 30 percent” wherein you have to save the 30% of what you earn every time to save up as much money passively.
Keep All Your Tax Documents
Another thing you have to make a habit is by keeping all the receipts you get may it be from fast foods, from convenience stores, groceries, etc. It will help you a lot in assessing all of your expenses and keeping you on track of where you waste your money too. It is also important that you always read the receipt and make sure that it is always right, check every tax statements stated.
Organize All Your Business Expenses
Being organized is everything especially if you no longer working for someone and work independently because it will surely help you out in avoiding paying a huge tax bill. It is also important that you are aware of all the things you made a transaction with and everything you purchased all throughout the year. These expenses can go a long way to reducing your taxable income, thus reducing your taxes.
Another thing to help you out is by using the mobile applications like QuickBooks to capture and categorize each receipt and GoDaddy Bookkeeping to update your expenses monthly.
Use a Separate Credit Card or Bank Account for Business Expenses
To help you in being organized, you can make other bank accounts solely dedicated for your business expenses, or a bank account that will have all of your savings intended to pay for taxes. Having a specific bank account exclusively for all your business expenses will help you in figuring out how much you should a lot to that and estimate your purchases. This means that when money comes, you just have to segregate it to different portions of liabilities based on your judgment. And at the end of the day, calculate your tax payment by using the GoDaddyBookKeeping!
Bonus Tip: The best small business credit cards also help you earn bonus points on your business purchases so you get cash or travel rewards that keep your business humming too. Don’t forget about the valuable sign-up bonuses too!
The freelancing job is not easy but the brighter side of it is that you are liable to many deductions compare to a normal employee. There are so many deductions you could avail and know each of them is important if you want to have a reduced tax bill to pay.
Internet Fees – If you are a freelancer whose job is dependent somehow on the internet, you can deduct your internet fee to your tax and if you worry because family also use it for non-business purposes, you are only liable to deduct the time you use it for business.
Home Office – Having your office at home can also be used to reduce your tax bill. The IRS makes it simple on how to avail this deduction, there are two methods, the first one is the simplified method wherein you just have to know the size of your workplace and multiply it to 5$. The other method is by knowing the percentage space taken up by your office in your home and multiplying it to 0.5.
Phone Expenses – Similar to the internet fees, you can deduct your phone expenses only if you use it for business purposes. You can not include the time you use your phone for personal matters.
Office Supplies – You can also deduct all the things you bought related or needed on your home-based office and that includes paper, clips, folders, staples, and etc.
Advertising and Promotion – You are able to promote your product and anything you use for promotion will be deducted from your tax.
Licenses and Permits – You have to be aware that all of the money you spent on the process of licensing and promotion is deductible. This includes even the registration fees you pay for.
Meals and Entertainment – In entertaining your clients, you no longer have to worry paying bills because 50% of it is deductible.
Equipment – All equipment needed for your business is deductible even the phones or IPad. It can be fully or partially deductible and if it cost too much, you might need to take that opportunity over time.
Travel – If you happen to have a business trip, it is deductible as long as it is a short-term vacation. You just have to keep all of the receipts of your expenses.
Outside Services – Any outside help you seek is deductible also like any other cost related business. And if you also seek advice to a tax or accounting expert, it is also included in the deductions.
Insurance Premiums – If you are currently paying for your own health insurance, write all of your premiums and see if you are able to meet each requirement. Business insurance is also included as well as other property and casualty insurances.
Rent or Lease Payments –If you are an independent contractor or freelancer who is renting a space or paying a building lease right now, you can save payments because it is also deductible!
Repairs and Maintenance – You can also use the cost of repairing equipment for your business to deduct your tax and it will surely help you in saving a lot.
Utilities – You will need a tax specialist on knowing how you can use the cost of electricity, gas, water, etc. to deduct your tax since you can’t just easily know how much electricity or water you use in your business and how much to exclude since you use it too for personal purpose.