Self Employed? 7 Ways to Maximize Your Income Tax Return
Self-employment has many benefits. For example, you can set work hours that work for you and your preferred working location.
Similarly, you can pick and work with projects that interest you. Self-employment also has some noteworthy tax benefits.
If you’re self-employed and looking to maximize your income tax returns, here are a few key ideas that can prove immensely helpful:
1. Take advantage of all your tax deduction
As a freelancer, entrepreneur, or self-employed business owner, you can take advantage of various tax deductions, including many business expenses, which can help reduce your tax burden and keep more money in your pocket.
You can deduct some expenses in your business, such as:
- Your home office, which entitles you to deduct a portion of rent or mortgage, repairs, and maintenance, and the cost of some utilities, to name a few
- Start-up costs, including the things like the cost of starting your business, advertising, wages and salaries, consulting fees, etc
- 100% of all business meals, drinks, and entertainment costs
- Wages, salaries, benefits, and medical expense
- Gifts for (employees) during holidays or special occasions
You can take advantage of many other deductions to maximize your income tax returns.
2. Increase your business-related expenses
Because you can deduct most business expenses, increasing, and then deducting them is one of the best and easiest ways to maximize your self-employment tax income. Think about it:
Because how much you pay in self-employment tax depends on your net income after making all your deductions, you can make planned business assets purchases to lower your deductible tax income.
Fundamentally, if you can prove that an expense helps keep your business operational, you can deduct it, thus maximizing your income tax.
3. Plan ahead to avoid surprises
When you are self-employed, you will want to avoid cash flow problems because there is a possibility of inconsistency or unreliable cash flow.
And because your income can vary weekly or monthly, it helps to set aside enough money to carry your business through cash crunch periods, especially when those periods align with tax season.
For example, you can calculate your quarterly tax bill, and then set aside this amount quarterly to ensure that once tax season comes around, you can meet your obligations without attracting penalties for late payments.
It would be best if you learned how to fill out a 1099-NEC form, but not because you’re required to do it. Your clients should fill out the 1099-NEC and send a copy to your address and the IRS before January 31st.
If you don’t get it in time, call your clients to ensure your income matches what they paid you. Otherwise, you’ll get audited.
4. Form an S-corp
This is one of the best ways to maximize your income tax return.
When you form an S-corp and become a salaried worker within your business, you only have to pay taxes on earned income; you won’t have to pay self-employment tax on any income you earn as dividends.
5. Keep all your receipts and records (for at least six years)
Keep copies and records of all your invoices. Having receipts dating back to 6 years can help with auditing, especially if you are an ex-pat.
Moreover, receipts/records will act as proof when claiming a tax deduction.
Having a separate bank account and credit card for your business is a good idea that can help you track all your business expenses.
6. Invest in retirement plans
Contributing to a non-taxable retirement plan like a traditional IRA,401K, or any eligible self-employment pension plan is another great way to reduce your tax burden.
Fundamentally, no matter where you are, the main thing to remember is that you should contribute to a non-taxable retirement plan.
7. Consider getting help
If you’re truly and genuinely struggling to find ways to file and maximize your income tax return, remember that there’s no shame in needing or seeking professional help, especially if your self-employment taxes have become more complicated.
A tax professional or service provider can help you find expenses you would not have filed as deductions, which can help lower your tax burden.
The above are just a few ways you, as a self-employed person, can lower your taxable income. There are many other ways to maximize your self-employment income tax returns, but these ideas should get you started.