6 Tax Tips for the Self-Employed 

Are you a self-employed individual looking to get the most out of your tax savings? Whether you’re a freelancer, consultant, or small business owner, managing your taxes effectively can significantly influence your bottom line. While there are plenty of strategies to minimize your taxable income, one of the most effective approaches is to hire a professional tax planner. In this blog post, we’ll explore six tips to help you optimize your tax savings.

Keep Accurate Records of Everything

If you’re self-employed, accurate recordkeeping should be the foundation of effective tax planning. Maintain meticulous records of your income and expenses related to your business. This includes invoices, receipts, bank statements, and any other relevant financial documents. By keeping accurate records throughout the year, you’ll have all the necessary information at your fingertips when it comes to submitting your taxes to the IRS or your tax consultant, helping you claim all eligible deductions and credits.

If you’re concerned about keeping accurate records, automating your recordkeeping can provide peace of mind. Invest in personal finance software that’s linked to your bank accounts. This helps save time, and you can be sure that you’ll have access to efficient and accurate records whenever you need them.

Take Advantage of Tax Deductions

One of the key benefits of being self-employed is the ability to deduct business expenses from your taxable income each year. Common deductible expenses for self-employed individuals include the following: 

  • Home office expenses.
  • Rent for office space.
  • Office supplies and equipment.
  • Up to $5,000 in startup costs.
  • Internet and phone bills used for business.
  • Travel and transportation costs.
  • Meals when traveling for business.
  • Professional fees, such as accounting or legal services.
  • Health insurance premiums.
  • Interest on bank loans.
  • Retirement contributions.
  • Marketing and advertising expenses.
  • Education or courses related to upskilling yourself for your business.

Some of these deductions can be complicated to understand and challenging to use correctly. Making a mistake on your taxes can result in costly penalties, which defeats the point of using the deduction in the first place. Consult with a tax professional, such as Pasquesi Sheppard in Lake Forest, to ensure you’re maximizing your deductions while staying compliant with tax laws and regulations.

Home Office Deductions: What To Know

The home office deduction is much more complex than many other tax deductions. There are numerous rules to follow which can be confusing, especially if you’re newly self-employed. You can deduct the cost of a space you’re consistently and exclusively using for business purposes, be it a home you own or a rental unit, as a home office expense. However, if you work from home, you can only write off a portion of the cost of the home for business purposes, as the rest is deemed for personal use. 

If you do decide to go this route, be sure to have your calculations ready to prove how you worked out the percentage or portion of deductible costs if you get audited by the IRS. Prepare for an audit by making an accurate diagram of your home office, showing the percentage of space it takes up in your home. You can then write off this percentage of your home expenses as business expenses. Here are some of the expenses you can write off as part of a home office deduction: 

  • Property taxes.
  • Mortgage interest.
  • Homeowners insurance.
  • Home depreciation.
  • Utilities.

An easy way to work out your home office deduction is by using the simplified method. This is calculated as $5 per square foot for the 2023 tax year, but your home office must be less than 300 square feet. Using this method, the most you’ll be able to deduct is $1,500 for the maximum size of 300 square feet.

Contribute to a Retirement Account

Saving for retirement is important for everyone, but it’s especially important if you’re self-employed and don’t have access to employer-sponsored retirement plans. Fortunately, there are several tax-advantaged retirement account options available to the self-employed, such as: 

  • Individual Retirement Accounts (IRAs): Traditional and Roth IRAs offer tax benefits, with contributions to traditional IRAs being tax-deductible and earnings growing tax-deferred until withdrawal. 
  • Simplified Employee Pension IRA: This retirement plan allows self-employed individuals to contribute up to 25% of their net self-employment income, up to a specified limit. 
  • Solo 401(k) Plan: Also known as a one-participant 401(k) plan, this option allows self-employed individuals to make both employer and employee contributions, potentially allowing for higher contribution limits compared to other retirement accounts. 

Contributing to these retirement accounts helps secure your financial future while reducing your current tax liability.

Consider a Health Savings Account

You can deduct health insurance premiums for yourself, your spouse, and your dependents to bring down your taxable income. For self-employed individuals who have a high-deductible health insurance plan, making regular contributions to a health savings account (HSA) can provide significant tax benefits. HSAs allow you to set aside money before taxes to pay for qualified medical expenses, lowering your taxable income in the process. Plus, any unused funds in the HSA roll over from year to year, providing valuable long-term savings for healthcare costs. 

Hire a Tax Practitioner

While it’s possible to do your self-employed taxes on your own, consulting a qualified tax planner or accountant can be beneficial, especially if you’re newly self-employed or you’re not fully aware of all the deductions that may benefit you. A tax professional can provide personalized advice, help you identify additional tax-saving opportunities, and ensure that you remain compliant with tax laws that are constantly changing. While hiring a tax planner may have some upfront costs, the potential tax savings and peace of mind they provide often outweigh the expense.

Save Money This Tax Season

If you’re self-employed, you have several opportunities to save money on taxes through careful planning and strategic decision-making. By keeping accurate records, maximizing deductions, contributing to HSAs and retirement accounts, and seeking professional guidance when needed, you can minimize your tax liability and keep more of your hard-earned money in your pocket. Remember, proactive tax planning is key to financial success as a self-employed worker. Need expert advice? Chat with the team at Pasquesi Sheppard today.

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