If you are self employed or own your own business, you have a unique set of tax issues. You also have to deal with constantly changing tax laws that can be confusing. Now that tax season is in full swing, here are 10 tips to help reduce your tax burden come April.
1. Keep Good Records
Self employed have to keep impeccable tax receipts. You’ll have to be able to prove all your tax deductions. There are a number of good tax softwares like Quicken, Expensify or Concur Breeze. By the way, did you know the IRS only requires the original receipt if the expense is over $75?
2. Deduct Office Space
You can deduct the portion of your home you use for business. Whether it a whole floor or just a room, you can deduct that portion that is used exclusively for business purposes. This goes for utilities as well. If you have a dedicated phone line within your home, that can be deducted as well.
3. Save All Your Receipts and Maintain Good Records
How many times have you thought you should have a better system for organizing your receipts? Keep all your receipts of business travel and other expenses, including office supplies, postage and shipping costs, dues, subscriptions, and anything else business related, such as computer equipment and software for your business and upgrades toyour system. There are many iPhone apps that allow you to photo a receipt and upload to online software for record keeping. Whatever you decide to use, create a simple filing system for receipts, and try not to let a year go by before you do the filing.
4. Deduct Car Mileage
You have two options for how you take this deduction. The first is to total the mileage and add in the tolls and parking to calculate your deduction. Once you have your mileage total, multiply it by the IRS-approved rate for mileage deduction. For 2011 it is 50 cents per mile.
The other method is to measure your business usage against your personal driving and deduct that portion of your auto-related expenses, including gas, repairs, and insurance, lease or loan payments, and depreciation.
If your company’s office is at your house, you can deduct all business-related mileage from the time you leave your home until you return home. If your business is not home-based, start recording your mileage and expenses from your first business-related destination and continue to your last.
5. Set Up a Retirement Plan
Consider setting up a self-employed qualified retirement plan both for tax purposes and to save money for your retirement years. SEP-IRA are perfect for sole proprietors and are generic retirement plans that allow you to contribute and deduct up to 20 percent of self-employment income (25 percent of salary if you’re an employee of your own corporation). They’re easy to set up and maintain with little cost.
You can also opt for a Keogh plan, which allows you to put away more into tax-deferred savings for your retirement. Keogh plans are the self-employed equivalent of corporate retirement programs. There are two types: profit-sharing plans and defined benefit pension plans. The plan must be established before year’s end for you to get a deduction for the current tax year.
6. Employ Family Members
Employing family members can help you save on taxes. As a business owner, you are allowed to deduct medical expenses for your family members if they are legitimate employees.
This is where the self-employed have an advantage over other taxpayers, who can generally only deduct health care costs that exceed 10 percent of their taxable income. If your business is home-based, the IRS allows you to write off your non-reimbursed health costs and those of your immediate family.
7. Defer Income if Necessary
If you believe that you’re heading into a higher tax bracket, you are, as a self-employed person, permitted to defer your income by shifting your billing. I have a friend of mine that actually asks his employer to pay him on the first check of the new year. Therefore, he defers the tax until the following year. Keep track of your income carefully throughout the year; you can save a substantial amount of money at tax time by making the appropriate changes to shift that income.
8. Get Money Back from FICA
Unfortunately, because you’re self-employed, you pay both the employer and employee portions of Social Security tax. The good news, from the IRS is: “You can deduct half of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.”
Remember, you’re solely responsible for paying your income tax — set aside enough funds so that you aren’t caught short when tax time rolls around. This can be a real challenge with income down in a tough economy.
9. Increase Expenses if Necessary
Just as you can elect to defer income, if you see that your income is high, you can make some year-end business purchases to increase your business tax deductions. This could be a good time to make those larger purchases you’ve been putting off.
10. Get Tax Advice
Get professional help with your taxes from someone who is familiar with the ins and outs of self-employment, because your needs will differ from those of a company. You’re responsible for paying income tax on your earnings and will most likely need the help of an accountant.
And again, don’t neglect your records. Because self-employed people can claim special tax reliefs and allowances, it’s important that you keep accurate and detailed records of all of your business transactions. It’s a pain, but necessary.