It’s tax time and if you’re self-employed, you’ll need to plan ahead. What you do between now and the April tax filing deadline can have a significant impact on the amount of income tax you owe. If you work for yourself, here are some important moves that you’ll need to make to reduce your tax bill.
1. Check Your Estimated Tax Payments
When you’re self-employed, you’re responsible for making sure that you pay taxes throughout the year. If you don’t pay enough estimated taxes each quarter, you run the risk of getting hit with a penalty.
The final quarterly payment for the tax year is due in January. So if you’re preparing to send a check to the IRS, you shouldn’t drop it in the mail without making sure you haven’t underpaid or overpaid your estimated taxes. If you need help figuring out how much you owe, you can use a tax calculator.
2. Find out What Tax Breaks You Qualify For
If you’re self-employed, you can potentially qualify for a variety of tax deductions that can lower your tax bill. For example, you can automatically claim the self-employment deduction since you have to pay the entire tax for Medicare and Social Security (15.3%) on your own. You can also claim deductions for business equipment you purchased during the tax year, business travel expenses (like the cost of the meals you eat and the hotel you stay in during a business trip) and interest paid on a business loan.
The home office deduction is another tax break that you may be able to take advantage of. But the rules for claiming it are tricky. For one thing, you’ll need to have a designated office space in your home that doesn’t serve any other purpose. You’ll also need to calculate your home office expenses (such as the cost of utilities and property taxes) and provide proof that you’re eligible to claim the deduction. If you’re not careful, you can raise your chances of getting audited by the IRS.
3. Top Off Your Qualified Savings Accounts
Being self-employed means you don’t have access to an employer’s retirement plan. But there are other tax-advantaged ways to save for retirement. For example, small business owners can stash away cash for the future in a solo 401(k), a traditional IRA or a Roth IRA.
Generally, you have until December 31st to contribute to a solo 401(k). If you missed that deadline, you can still make contributions to a traditional IRA or a Roth IRA until the April tax filing deadline.
Filing your taxes is a bit more complicated when you’re self-employed. And if you’re not careful, you could end up costing yourself money. Maximizing opportunities to shrink your tax liability through deductions and contributions to qualified retirement plans can protect your bottom line during tax season. And keep in mind that if you need help with your tax return, you can always contact a tax professional.
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