Being your own boss has its own set of advantages unlike anything else. The only problem is the tax mess you often find yourself in, often alone and without help. The benefit of being an employee is the employer is responsible for half of your taxes and much of the mental wrangling associated with taxing.
After reading this post you will be equipped with ideas to deal a large tax bill on your own and discover tips to make tax filing easier than ever.
#1 – Set up a tax savings account
Most people when faced with taxes often turn up short on funds. This can be solved by having a separate tax savings account. An account in the same bank or other banks works just as well.
Having one account seems easier at first but then it’s easy to get lost between personal and business transactions and you will spend many hours sorting out the mess categorizing expenses as business or personal. With separate accounts, everything is so easily streamlined that there’s no scope for confusion.
As money comes from your freelance projects you can earmark a portion of that amount and transfer it to the savings account.
That way you will never find yourself short of money when it comes to paying taxes.
#2 – Use an app to automate tax savings
There are hundreds of apps available today that can help you with saving for a rainy day.
This app automatically withdraws small amounts of money a few times a week to be saved as part of the tax savings account.
There are also options to make manual transfers if you’re not happy with the tiny transfers. Expensify, Shoeboxed and other apps are pretty useful in this regard.
#3 – Don’t skip quarterly tax payments
Quarterly tax payments are a necessity. They have to be paid on amounts as soon as you earn them.
IRS wants to tax you 4 times a year. And without making those payments you will be scrambling for the requisite amount at the end of the year. In addition, penalties too will be dished out.
Remember the dates for quarterly payments. They’re due on the 15th of each month at the end of quarter. 3 months is a quarter. And taxes for October 1 to Dec 31 are due on Jan 15. On time payments are necessary because without them you will be attracting penalties and high interest charges on unpaid taxes.
The problem is without estimated payments made on time you would forced to pay a large sum at the end of the tax season along with penalties which isn’t the best of situations you can find yourself in.
#4 – Keep business expenses organized
In order to avoid huge tax bills be as systematic as possible when it comes to taxes organizing and keeping track of every expense and every item purchased during the year.
Expenses are what count towards reducing the tax bill and if you keep a sharp finger on expenses there’s nothing else needed to reduce taxes.
You can use QuickBook’s self-employed tax tool to enter amounts as and when they arrive in your bank accounts.
If you don’t want that, you could use Google Sheets or simply an Excel sheet where you can update expenses every month as and when they occur.
With these simple methods, you know every expense you’ve incurred in your business including repairs, purchase of furniture, scanners and laptops and never miss on tax savings.
#5 – Don’t forget your tax deductions
As a business owner you will be eligible for tax saving deductions solely due to virtue of being an online business owner.
You don’t want to miss any of these tax deductions. Even if you’re working from with a home office there will be deductions you qualify for but don’t know about it yet.
As the number of deductions multiply you will have less tax to pay and will avoid a huge tax bill.
There are several methods to calculate how to deduct taxes when working from a home office:
Percentage of your home method:
If you’re using a room in your house exclusively for working at home this makes up your home office.
To figure out the proportion measure the square footage of your home office and calculate what percentage of the home does it make up. If its 200 sq feet and the home is 1500 square feet the percentage would be 200/1500 * 100.
Simplified square footage method:
There’s also a simplified square footage method that the IRS came up with beginning 2013. In this, you can use the prescribed rate of $5 for deductions.If your home office is 300 square foot then multiplying by $5 gives you $750 as a deduction.
The prescribed rates are changed every year and you might not qualify the next year.
Under home office here are the expenses that you may deduct:
Money spent on repairing or maintaining a business space is tax-deductible. Painting the room of your home office can be entirely deducted. The telephone line’s cost to your home office can be partially deducted along with the full cost of any special line. For instance, I have broadband set up to my home office that no one else at home uses.
The cost can be entirely written off. Most of my clients are based outside my country and so long distance calls too are deductible.
There are also several indirect expenses that make up the costs of your home office. If you’re using the non-simplified square footage area for calculation and your office takes up 20% of the area in your home you can deduct 20% of the utility costs, costs for maintenance, building expenses and any repair work done at your home and make them as business write-offs.
Interest and property taxes
Mortgage interest along with property taxes can be deducted as home office costs.
Convert these expenses to business write ups.
Deducting rent, or depreciating
If you’re renting a home with a home office deduct the part of the home that you’re using as a home office.
So these are the different ways you can save a ton of money on taxes. The key is to look for all possible deductions and reduce taxes as much as possible.
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Read more: The Small Business Guide to Payroll