Working as your own boss can be an exciting and refreshing way to make a living for yourself. If you’re new to being self-employed, you may be wondering about how to navigate tax issues. Without having an employer to help subsidize some of your employment taxes, you must shoulder the burden yourself. Doing your taxes doesn’t have to be stressful if you know a few tips to help you keep more of your income each year. Here are five tips to help lessen the blow on your taxes if you’re self-employed.
1. Track Your Spending
The best piece of advice to follow all year long is to track all of your spending. The key to keeping your money and reducing your tax burden is to be able to justify a lower tax rate. If you have the right documentation for things you have paid for, such as invoices or receipts, you can research ways to lower your tax responsibility. It’s best to use an electronic software program to help organize this information easily.
2. Use Business Deductions
The best way to lower your tax rate is to use business deductions. Those who work as independent contractors have to figure out a way to keep their personal and business expenses separate. Then, you’ve got to look at all of your business costs and see which ones would qualify as a deductible expense. Anything that is a necessary cost for the success of your business would usually be something you could deduct on your taxes. If your business is home-based, you may even be able to deduct your home office expenses.
3. Think About a Health Savings Account
Self-employed workers may also have a tough time getting insurance coverage. If you work for yourself or own a business, it’s tough to find affordable health plans. Many people in this situation look to their spouses’ employers to help. Another way you can help manage your medical costs each year as a self-employed person is to consider getting a health savings account. You can set this account up in the beginning of the year to pay for typical medical costs. Best of all, you can reduce your tax liability by putting this money aside.
4. Deduct Car Expenses
Some entrepreneurs use their cars for business purposes. If this sounds like you, be sure to deduct things like mileage or car insurance on your tax forms. It’s important to discuss the implications of using your car for business reasons with your local insurance agent. Your agent can help you get the right coverage if you spend much of your time in your car for work.
5. Invest in Retirement
The last way to get a more reasonable tax rate with your self-employed income is to invest your money back into retirement. Without an employer, the independent contractor may have a more difficult time saving up for retirement. That’s why it’s essential to make a significant contribution to your retirement account each year. You could get a break on your taxes and also prepare for the future.
Don’t be scared about your tax bill come April every year if you work for yourself. Plan ahead throughout the year to make the tax impact much more manageable.