Use These 5 Tips to Improve Your Tax Season
If you’re an entrepreneur knowing how to navigate some of the complexities of tax season will be useful for you. The sooner you wrap your mind around how critical it is to be meticulous about your approach to filing taxes, the better off you’re apt to be.
Many people feel confused and poorly informed about taxes. When people don’t understand taxes, they’re less likely to see the value in filing them.
Unfamiliarity with tax basics is harmful. Most Americans receive W-2s, which cover most of the complications on the income side of things, but entrepreneurs are often in unique situations where they receive 1099s and other documents that employed workers don’t have to handle.
American entrepreneurs enjoy plenty of systems, rules, deductions, and exemptions to help them operate, but many are fairly uneducated about such matters and habitually leave money on the table year after year. If you’re an entrepreneur, you need to make sure you aren’t losing out because of your fears and anxieties.
You need to grab the bull by the horns and be proactive about your tax situation. The more you generate positive traction in this area, the less stressful and complicated it’ll be for you.
If you’d like to make tax season a breeze, here are five helpful techniques for entrepreneurs to be more strategic with their taxes.
- Have a System for Recording Expenses
Trying to do all of your tax preparation right at the deadline is a sure-fire recipe for disaster. You’re going to have difficulty tracking down everything you need in time, and you’ll just overwhelm yourself.
Want to do your future self a favor? Develop a system for recording expenses so you can stay on top of your accounting throughout the year.
Technology makes recording expenses easy. For example, out Prosper app by N&T (app store link HERE) allows you to take photos of receipts, manually log expenses, and develop monthly profit and loss reports while you’re on the go. There is both a free version and the full version is just $5 per month.
If a more robust accounting software is what you need then QuickBooks Online is the way to go.
- Find Ways to Lower Your Taxable Income
Once you have a concrete system in place for recording expenses and organizing tax-related documents, your focus should shift toward strategically lowering your taxable income. There are many different ways to reduce your income through deductions and credits.
The more you learn about this topic, the more you are likely to save. Here are a few of the areas worth exploring:
- Tax-deferred retirement accounts. Saving for retirement is always smart, but it’s especially useful when you use a tax-deferred account, such as a traditional IRA. “If you’re an employee of your business and under age 50, you can deduct up to $6,000 to reduce your taxable income; the amount goes up to $7,000 if you’re over age 50. Those tax deferred amounts increase greatly if you open a 401k or a SEP-IRA.
- Home office. As an entrepreneur, chances are you spend time working from home. One of the easiest deductions to claim is the home office deduction. There are two methods you can use. The traditional one allows you to deduct your office’s square footage from the overall square footage of the home (as a percentage). The simplified version lets you write off up to 300 square feet at $5 per square foot. Listen to my recent podcast on this topic.
- Health expenses. If you have a high-deductible health insurance plan, you should be taking advantage of a Health Savings Account (HSA). An HSA essentially allows you to set aside some money — tax deductible — that will go to future medical expenses. It’s smart to throw in as much as you possibly can each year since you’re bound to have medical expenses eventually. Any remaining balance rolls over annually. This is a favorite option of mine. I use Lively HSA which is free for individuals and you can open an account online in a few minutes.
This list serves as nothing more than a starting point for lowering your taxable income. Hundreds of other deductions and credits are out there to be employed. Do some due diligence and look for other opportunities to save.
- Pay Quarterly Estimated Taxes
New entrepreneurs are often confused about how and when to pay taxes. The tax deadline is the same for everyone, but 1099 contractors and sole proprietors must pay quarterly estimated taxes throughout the year.
“The IRS expects self-employed individuals to pay federal income tax throughout the year, and if you don’t pay estimated taxes each quarter they can charge you interest and impose nonpayment penalties. In general, you have to make estimated tax payments if you expect to owe at least $1,000 in taxes.
This is when I use the monthly profit and loss reports from either the Prosper app or Quickbooks online to review net income and estimate how much would be owed in taxes for that time period. It helps me see if we are getting near that $1,000 threshold.
- Try to be as Accurate as Possible
It’s crucial that you try to be as accurate as possible with your quarterly estimated payments.
It’s not smart to overpay with the expectation of getting a big return. Getting a massive tax return only indicates that you’ve given the IRS an interest-free loan. If you take the trouble to arrive at a more accurate figure, you can put that money to work for you throughout the year.
- Actually Learn What You’re Doing
It’s one thing to look up a question online and find an easy answer. But that’s not the same as actually researching your question and developing a concrete understanding of how the tax system works and what you can do, as an entrepreneur, to make the most of your income.
When you take the time to learn what you’re doing, tax season will start to feel more natural. As a result, you can focus on the business itself and avoid feeling like all your time is eaten by having to deal with last year’s accounting.
So, with all that being said. Don’t Let Taxes Consume You
When you’re an entrepreneur, taxes can be a source of pain and headaches. But you can transform them into just one of the many responsibilities you have to tackle on an annual basis.
It might not feel like it, but this is ultimately your choice. You can either get stressed out about taxes and let them consume you every year, or you can be proactive and get this facet of your life under control and humming along evenly. Which will it be for you?
The sooner you wrap your mind around how critical it is to be meticulous about your approach to finances filing taxes, the better off you’re apt to be.