Whether you’ve been self-employed for years or just became your own boss last year, there are tax and retirement implications you have to take into account throughout the year.
From opening the most tax-advantaged retirement plan to understanding tax rules, here’s a look at four money-saving tips every self-employed person should consider.
1. Become Your Own Tax Advocate
Research and ask for referrals for potential tax professionals before hiring one and don’t be afraid to re-evaluate the person you’ve hired in the past to make sure he or she still fits your financial situations.
The filing process becomes much more complicated when you are self-employed, which is why it falls on you to understand all the different tax rules and implications. “Going in to tax time, even if you have a tax preparer or advisor, you still have to understand what’s on your return,” says Paul Gevertzman, partner at accounting firm Anchin, Block & Anchin in New York. “Sometimes mistakes get made and things get over looked. Don’t accept what’s put in front of you unless you understand it.”
2. Don’t Leave Money on the Table
Being self-employed typically comes with a lot of business expenses, many of which can be deducted and reduce your overall income and your taxes.
Unfortunately, self-employed workers often leave money on the table because they don’t know about certain deductions or don’t have accurate information and detailed records.
Gevertzman points to meal and car usage deductions as areas on tax returns that are rife with mistakes. “When you have meals and entertainment type of expenses, there is a fine line as to what qualifies as a deduction,” he says. “A lot of people think there is a 50% limitation on all meals related to the business and that’s not always true.”
There are instances when you can deduct 100% of these expenses. For example, he says you may only be able to deduct 50% of costs associated with entertaining a customer or a potential client, but you could deduct the entire expense if you are picking up the meals for employees working or a holiday office party. However, if there are customers at the party, then the deduction goes back down to 50%, according to Gevertzman.
In the case of vehicle deductions, Rusty Ross, certified public account with Exencial Wealth Advisors in Oklahoma City, says self-employed people often take the mileage deduction but forget about the other things they can write off like the interest paid on the vehicle’s loan, registration fees and parking and toll expenses.
3. Open a Tax-Advantaged Retirement Account
Saving for retirement should remain a priority for you and your employees, and Ross says a tax- advantaged way to do that is to open up a Simplified Employee Pension Individual Retirement Arrangement or a SEP IRA. This account lets self-employed workers contribute up to 25% of their net income or $51,000 for 2013 and $52,000 for 2014, which will reduce their overall income and the amount they pay in taxes.
“The good news for self-employed people is they can set this account up and fund it by either April 15 or by October 15 and shelter up to 25% of their income,” he says.
4. Hire Family and Friends
Adding family members and friends to your payroll not only means you know your employees, it can also save you money come tax season, according to David Colgren, a spokesman for the Society of Certified Public Accounts.
“Hiring a family member to work for your business can create tax savings for you. In effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you,” he says.
Keep in mind that the IRS can question unreasonable compensation to a family member so don’t go overboard on the salary. If you hire a minor, Colgren advises to take extra steps to make sure you are following all the child labor laws and regulations.