Tax season can be a stressful time for small business owners. The thought of paying Uncle Sam your hard-earned money is not a pleasant idea. However, the good news is there are many ways you can lower or reduce how much you pay the government. In this article, we'll introduce 7 tax hacks for self-employed business owners to save money and pay fewer taxes. First, let's break down the tax liability you'll owe.
Note: If you want tax software to help you manage your write-offs and send you important due date filing reminders, try Bonsai Tax. Our app will scan your bank/credit card receipts to discover potential tax write-offs and help you maximize your savings. Typically, users save $5,600 from their tax bill. Claim your 7-day free trial today.
Self-Employment Tax 101
If you are a small business owner, you won't have your taxes withheld by an employer from every paycheck. Full-time employees have their taxes withheld from each paycheck in order to pay for Federal taxes. Self-employed individuals are responsible for paying the employer's portion of their taxes.
Self-employment taxes are composed of Social Security and Medicare taxes. This amounts to
Now, let's dive into 7 tax tips to help you save money on your tax return.
7 Tax Hacks For Small Business Owners
Here are 7 tax hacks a small business owner can leverage to save money during tax season.
1. Claim Business Expenses
This is the most common and easy hack to use. The Internal Revenue Service allows business owners to write off the expenses they incur from running their business throughout the year. Any "ordinary" and "necessary" expense for your business can be used to lower your taxable income.
Some common tax deductions for small business owners to deduct during tax time are:
- Internet services
- Office supplies
- Business equipment
- Mileage (use our mileage template to track miles)
- Vehicle expenses (a company car or one you use for your business can use the actual or standard mileage method to deduct car expenses)
- Business meals
- Home space
- Medical expenses
- Continued education or training costs
- Self-employment taxes
- Travel expenses (commuting to work does not typically count as a deductible expense)
- Related newspaper or magazine subscription
- Rent
- Health insurance
- Legal costs
- Start-up fees
- Advertising fees
See our 1099 deductions guide for more information for a full description of write-offs you can claim.
If you have old equipment, don't sell it yet. By abandoning the tools, a business owner will incur an ordinary loss which might be a better option because it's fully deductible.
If you don't, however, want to keep detailed records of all your business expenses, then opt to take the standard deduction. The standard deduction is a dollar amount that non-itemizers may subtract from their income before income tax is applied.
If you want to skip using a worksheet for self-employed deductions to record all your expenses and use a tax software to handle it all for you, then try Bonsai Tax. Our app will scan your bank/credit card receipts to discover potential tax deductions you can claim at the end of the year. Users of our app typically save $5,600 from their tax bill. Try a 7-day free trial here.
Automatic Business Deduction
This tax write-off was introduced by the Tax Cuts and Jobs Act at the end of 2017.
The amounts you can deduct for the 2021 year are:
- $12,550 for single taxpayers
- $12,550 for married taxpayers filing separately
- $18,800 for heads of households
- $25,100 for married taxpayers filing jointly
- $25,100 for qualifying surviving spouses
The amount you can deduct was increased for the 2022 tax year. They are:
- $12,950 for single taxpayers
- $12,950 for married taxpayers filing separately
- $19,400 for heads of households
- $25,900 for married taxpayers filing jointly
- $25,900 for qualifying surviving spouses
Track your income and expenses with our free tax ledger template.
Standard Versus Itemized Deduction
Here's a quick breakdown of the itemized deduction versus the standard. The standard way lowers your income by one fixed amount. On the other hand, itemizing deductions from a list of eligible expenses, you'll track your receipts and lower your tax bill by deducting business expenses. You can claim whichever method lowers your tax bill the most.
When it comes to deducting tax write-offs and lowering your taxable income, claiming itemized deductions typically results in higher deductions. That is why it is vital to keep proper records of your business receipts.
2. Use A Tax Filing Software
In the modern age, tax filing software can take away the pain of filing your own taxes. All you need to do is answer questions about your business, and tax software will help you seamlessly file your taxes.
The beauty of tax filing software is self-employed folks with little to zero tax knowledge can accurately file their tax returns, avoid IRS audits, get maximize their owed refund.
For example, Bonsai Tax is one of the best tax software for small business owners. The app scans your bank/credit card receipts to discover tax deductions from your spending throughout the year. Try a 7-day free trial of our small business software today.
The average cost of most tax software is ~$20.
Alternatively, you could even use the government's FreeFile program. Depending on your income, you may be able to prepare and file your taxes at no cost.
3. Open A Retirement Savings
A freelancer can have their taxable income reduced by investing or putting money aside in a traditional retirement account. A financial advisor can help you open retirement savings account to help you avoid paying taxes. Contributions to an individual retirement account (IRA) are tax-deductible. The IRS has special tax benefits for folks who invest in an IRA. Self-employed individuals can invest in tax-deferred retirement savings.
This means, freelancers or self-employed can contribute up to $6,000 for 2021 and 2022, and you can write it off from your tax liability. They are deductible in the year during which they are paid. You'll only need to pay tax on the contributions after you retire and withdraw from the account.
4. Qualified Business Income (QBI)
The QBI deduction was introduced by the IRS on December 31st, 2017. Eligible self-employed and small-business owners (total taxable income in 2021 is at or below $164,900 for single filers and $329,800 for joint filers), may be eligible for a 20% write-off on your taxable business income.
Who Qualifies?
The qualified business income deduction was designed for folks with "pass-through income" or business income reported on a personal tax return. Here's a list of entities that qualify to claim the QBI deduction.
- Sole proprietorships.
- Partnerships.
- S corporations.
- Limited liability companies.
Read more here for how to claim the QBI Deduction.
5. Claim Home Office Deductions To Lower Your Taxable Income
If you have a space in your home that you use as your "principal place of business", then you may qualify for the home office deduction. Whether you're a homeowner or a renter, you can claim the deduction for any type of residence you live in, including a single-family home, an apartment, a condo, or a houseboat. You can't use it to stay in a hotel or any other type of temporary accommodation.
There are two IRS-approved methods to claim this deduction, the simplified and actual expense methods.
Simplified Method
The IRS introduced this method to calculate a home office deduction with ease. To calculate this write-off, simply measure your home office space you designate for business use, and multiply it by the IRS's "per feet rate". The rate for 2021 is 5$ per square foot with a maximum of 300 feet ($1,500 per year).
Actual Expense Method
Using this method requires you to keep receipts for your home office expenses. Track the actual expenses you incur to make your earnings when working from home.
Receipts such as:
- repairs for home
- office supplies
- home utilities
- insurance
- cleaning costs
- phone and wifi
- computer/laptop expenses
- utilities
- furniture (chair/desk)
- mortgage interest
- real estate taxes
Qualified home-related itemized deductions can be claimed in full on a Schedule A.
6. Work With A Certified Public Accountant
Tax accountants have vast industry knowledge to save you a LOT of time when it comes to tax filing. You see, a professional accountant could help you create a tax strategy to lower your tax bill.
Small businesses that work with a CPA can discover a customized game plan to avoid paying taxes. Not only will a tax preparer help you file your taxes, but they could also give you advice on ways to spend, save, or invest money in the future. This can help you prepare for the next tax year.
An accountant could help you set up quarterly tax payments to be withdrawn from your bank account or earnings so you don't have to pay the government one "lump sum" during tax time.
7. Hire Sub-Contractors Instead Of Employees
Small business owners have the luxury of subcontracting out work to other freelancers. Businesses that hire freelancers do not have to pay payroll taxes. Employers have to cover half of Social Security and Medicare taxes on top of the employee's salaries.
Typically, you can save a lot more money hiring a freelancer instead of hiring a full-time employee. For example, if you need content written for your marketing, hiring a full-time professional writer would require you to pay for benefits such as health care, disability insurance, unemployment insurance, income protection, etc. A contractor, on the other hand, you wouldn't have to pay for those.
Use These Tax Tips To Save You Money At The End Of The Year
There you have it. Tax hacks to save you money during tax time. If you want an easy way to get through tax season and save a ton of money, try Bonsai Tax. Our app sends you filing reminders so you don't miss a tax payment as well as track your deductions. On average, users save $5,600 from their small business tax bill. Try a 7-day free trial today.
Don't forget to set aside money to pay for your tax liability. Since income/self-employment tax is calculated based on how much you earn, set aside a percentage from your monthly income. Most accountants recommend at least setting aside 30% of your payments in order to be safe.
