I enjoy encouraging small business owners, freelancers, and other self-employed entrepreneurs to flourish! So much so that I want to share with you success-driven tips for optimizing your tax situation. I understand that thinking about taxes as a self-employed worker can be daunting or overwhelming but I am here to make sure you know what opportunities you might have so that you can continue growing.
Am I self-employed?
Before we jump into the tax tips, let's take a look at what it means to be self-employed. According to the IRS, you are generally self-employed if any of the following apply to you:
- You carry on a trade or business as a sole proprietor or independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (i.e. part-time business or work gig).
Is that you? Then let's continue with talking about how can you optimize your tax situation.
Tax Tips for Self-Employed Workers
Here are two main tips for those of you that are your own boss!
1. First, track your business expenses carefully.
In order to do this accurately, we need to answer the following question first. What is a business expense?
According to the IRS definition, those expenses must be "ordinary" and "necessary" to your business. To give you an example, the domain hosting costs and the cost of purchasing your business website URL would count as business expenses. However, your own personal website costs that is not related to your business is not a business expense.
Now that we have differentiated what a business expense is, let's talk about my first recommendation. I generally recommend having a separate bank account strictly for the business. This way you could track your business expenses and of course keep your receipts, and not have the issue of co-mingling your business with your personal expenses.
You can even make your life easier if you automate your record-keeping. If you want to leave paper receipts and disorganization in the past, you might be interested in personal finance software. Personal finance software can be synchronized to your bank accounts to make it easier for you to track business expenses.
Ultimately, the focus here is to keep an accurate record of business expenses for when you consult a tax advisor and provide them with your expenses. Let's get the best tax return for you!
2. Second, consider setting up an LLC and electing to treat it as an S-Corp.
You should consider setting up an LLC and electing to treat it as an S-Corp if you're a US citizen or U.S. tax resident. S-Corps status can only be acquired by businesses, so only a self-employed person that registers a business ie. LLC, can select to be treated as an S-Corporation for tax purposes. If you're a self-employed person and have no registered business, you're only considered a Sole Proprietor for tax purposes and cannot make any corporation status election to be treated as a corporation for tax purposes. An S-Corp could help you save on your self-employment tax portion which is a payment that covers your U.S. Social Security and Medicare.
Are you wondering how exactly you can save on self-employment tax with an S-Corp?
Well, you do that by taking a portion of your business profits as a salary, which would be subject to self employment tax: 15.3% tax that covers your Social Security and Medicare payments, and the other portion of your business profits would be a distribution. The distribution is not subject to that 15.3% self-employment tax. Thus, you can save a lot of money! I must mention that this is a very complicated area of taxation because you have to make an election for your LLC to be treated as an S-Corp, and all your specific circumstances must be considered to truly benefit tax-wise. Check out my blog about S-Corp to find out if you qualify for this status!
I am here to help
A professional and licensed tax professional can help you determine the best approach to manage your self-employment tax structure. So if this is something that you’re considering or, you have further questions about self-employment, sole-proprietor status, setting up an LLC, or electing to be treated as an S Corporation, and you’re interested in hiring our services to set up the right business structure for you, contact me and I’ll be happy to help explain and guide you on how this could impact and benefit your income, taxes and business profits.