7 Tax Hacks For Self-employed Folks: What You Need To Know About

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Tom Smery

Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

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 14-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 tax software to handle all your deductions 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 14-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

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 14-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 14-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.

What Defines a Verbal Contract?

A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.

Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.

Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.

The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.

Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.

When is a Verbal Agreement Legally Binding?

For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.

How strong is a verbal agreement in court?

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.

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When are verbal agreements not enforceable?

There are some types of contracts which must be in writing.

The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.

Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.

How are Verbal Contracts Enforced?

Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?

How can you prove an oral contract?

Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!

If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.

Written vs Verbal Contracts: What's the Verdict?

Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.

So, ultimately, the question is: written or verbal agreements?

Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.

Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.

"@bonsaiinc is probably my all time favorite freelance tool. hands down. the team is super responsive and accessible when i have questions."

David Urbinati

Motion design / animation

Say hello to digital contracts

Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.

There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.

Benefits of written contracts

A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.

Create Professional Contracts with Bonsai

Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.

With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.

Why not secure your business today and sign up for a free trial?