How do I handle taxes as a self-employed professional?
A guide for new business owners
There is a lot of bad information out there. I have been self-employed all but a few years of my adult life and there are a few things that I have learned.
I am not a CPA or a tax preparer, but I am a business owner and I’m trying to share some practical advice that I learned through some time consuming, and expensive, trial and error.
The most critical is to separate fact from fiction and that involves being prepared then asking someone who actually knows. Therefore, I recommend you keep detailed, accurate notes on all expenses that could potentially be deducted. I do this 2 ways:
I keep a plastic tub for all receipts, expenses, and notes on finances. I keep the copies of my quarterly estimated payments, check carbons, etc neatly organized in this tub. I have one for each year. This seemed like overkill until I moved 2 years ago. I found out I had to have records for home office deductions for the previous 23 years at my old house. I had a copy of every tax return in its tub, so this took me about an hour to scan to my accountant. A tedious, but not impossible, task.
I also maintain budgeting software for personal and business. Each month’s business net expenses/earnings are a line item in the income section of my personal budgeting. This allows me to monitor my earnings more easily. Furthermore, because I have a monthly tracking [that pulls in data from expenses for personal and business] at tax time I just run a report. This is a task that used to take more than 40 hours each year at tax time, now reduced to only a couple of hours to double-check items and create the profit & loss statement.
Maximizing Deductions:
Unfortunately there are people out there who like to give the impression that every single expense you have can legally be deducted as a business expense. This is inaccurate and also creates overspending because “it is deductible”.
Let me explain the danger. To keep math easy, I’m going to pretend you have purchased something for $100. When someone says, “It’s a tax writeoff” the perception some have is you got it free. No. You paid for it. It comes out of income you could have used for other things. The only difference is you are not paying state, local and city tax on that item. That is it. So, if your total tax rate is even 40%, you still paid 60% for the item.
I give you this caution, so you don’t overspend on “deductions”. See the deduction as a way to save tax dollars on things to build your business.
Based on all of this, I recommend the following:
Work with a tax professional specializing in small businesses. If you choose to use a computer system for your taxes, at the very least, hire them for an hour or two to tell you what to deduct, what to gather, documentation, tax strategies, etc.
Use quarterly estimated tax payment systems and make sure you’re paying in quarterly. It is not enough to pay at the end of the year.
Practical Actions:
Create a way to collect and organize all income and expense documentation
Set aside 25-30% of each payment for potential tax obligations
None of this is tax advice and I am not a tax preparer. I offer these as ideas to help you gain your maximum deductions and have the best records at tax time.
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