So you’ve started out in your own business. AWESOME!! The effort of becoming financially independent, and regaining freedom of your time requires you to take action, and you have.
Maybe you’ve made your first sales, or started to bring in a profit. Maybe you’ve been doing this for a while and have had some really good years, or maybe you’ve hit a slump where the budget got a bit tighter.
You might be the owner of a multi-million dollar business, or have your own private practice in some field that’s working out well, and bringing in a lot of income.
No matter where you are, I think that almost every self-employed person in the world can agree on 1 big pain point…
So Where Do You Begin?
1. If You Want To Avoid Tax Headaches, You Need To Keep Track Of Things
One of the most painful feelings as a business owner is getting hit with a HUGE expense in taxes. Reaching tax season and being shocked to find that you owe thousands of dollars in taxes can send a lot of self-employed people into a tail spin.
You don’t have an employer taking your taxes out FOR you, so of course you need to be setting it aside, and keeping track of it. This is probably the most basic, and the most obvious part of doing tax when self-employed.
Keeping track of things can be really easy! I use a free app on my phone called Stride Tax.
Stride Tax is a nifty little invention. Not only is it a consolidated space where you can enter all of your expenses to track your deductions, but it can also be used to track your mileage, and to keep track of your earnings. It then calculates your taxes, AND your deductions, FOR you.
You just need to enter information into Stride Tax consistently to make sure you’re keeping it up to date. Trust me, it’s a lot better than writing things down on scraps of paper, and a lot less time consuming than an Excel spreadsheet.
If you’re keeping track of your earnings, and the money you’ll be needing to set aside for tax season, you’ll be prepared for the exact amount owed. The more you can simplify this through resources like Stride Tax, the less time tax prep will take away from your more important pursuits. You can read about more of the details of Stride Tax right here!
Keeping track of deductions is also one of the great uses of Stride Tax, which brings me to my next point…
2. Catch Every Single Deduction You Can!
When you’re self-employed, a lot more things are going to be your responsibility. Every expense that comes your way can feel really stressful at first.
But don’t panic!
Here’s the good news. You probably realize that a TON of your expenses can create deductions in your taxes. The less you have to pay at the end of the year, the more money is staying in your pocket, so it’s in your best interest to find every single deduction you can.
You may not even realize everything that’s potentially deductible. It will depend on what your business is like, and what resources you use, but here are many of them:
- your internet bill
- your phone bills (cell phone included)
- the miles you drive ($0.54 per mile)
- printers, ink, paper, any accessories or supplies
- your laptop, tablet, or desktop
- the cost of any licensing or certificates if you need it
- don’t miss ANY of it!
If you work from home, you can even deduct a lot of your HOUSEHOLD expenses! If you don’t have an office pick out the room in your house where you most often work from. You’ll need to measure the square footage of that room, and calculate what percentage of the total square footage of your house it is. Take that percentage, and apply it to your phone bill, internet bill, rent or mortgage, heating, electricity, and any other bill connected to your house.
Think of it this way. If you work from your laptop in your living room, and your living room makes up about 20% of the total square footage of your house, take 20% of your annual house-related bills, and write it off of your taxes!
Using these deductions, you can save a lot of your money from being taken! Without having to put a lock on spending…
3. Use Tax-Savvy Investments
If you’re bringing in a lot of profit through your business, one of the best things you can do is to shelter your money in some tax-savvy investments.
There are ways that you can take a massive chunk out of either your annual tax, OR the taxes you get in retirement.
The #1 strategy I recommend is using life insurance.
This is not a strategy that many self-employed professionals, especially those who have only been in business for a few years, are aware of. But it can be amazingly effective.
When most people think of life insurance, they think of it as an investment they make to protect their families financially if they were to die. Believe it or not, because of inherent tax advantages built into life insurance, you can also use it as a lucrative retirement investment.
Without breaking tax law.
There are two different strategies you can use, depending on your need.
1. An Indexed Universal Life policy
Make sure you get help from an expert agent who specializes in this to make sure you get everything you need. This is essentially how it works:
You can have an Indexed Universal Life policy customized so the majority of the money you put into it is going into the cash value. This is money you can take out in retirement! The Indexed part means that the life insurance company uses stock market indices to give you interest rates up to 12.5% with no risk of loss!
Here’s the tax advantage part. The withdrawals that you make from the policy in retirement are 100% nontaxable. Not only this, but it also will not count towards your tax bracket. This means that if you’re living on $100,000 per year in retirement, and $75,000 of it is coming from your life policy, the government will only tax you as if you were making $25,000 per year.
2. A 412-E3 Whole Life Plan
It’s a scary code name, I know. But the company National Life Group (a.k.a. Life of the Southwest) and several others offer a special plan to save taxes on the front end.
You’ll have to pay some taxes on the withdrawals that you make during retirement, and the gains you make through its investments, but if you’re making a 6-figure profit through your business you can actually prevent huge amounts of it from getting taxed away by stashing it straight into the whole life policy.
Treat this life policy as if you were putting it into a savings account, with the added benefits of a minimum 5% interest rate, and not having to pay tax on that income.
You can plan the exact amount you put into the policy strategically, because you can even use it to manipulate your tax bracket. For example, say this year your business hits $91,900 in profit near the end of the fiscal year – as soon as you go over this $91,900 amount you will be getting taxed 28%, instead of 25% of your income because you’ve entered the next bracket…
… Simply put the extra money you make beyond that $91,900 into your life policy to be saved for later! You’ll keep your entire tax percentage down to 25%, but still keep a large amount of the money you made beyond $91,900, and this is legal!
Tax Strategy Is An Art That Can Save You A Lot Of $$$
These are some of strategies that you can be applying to your taxes as a self-employed person. And it has the potential to save you a LOT of money!
If you have questions about more advanced tax strategy and investing just comment below, for United States residents operating business in the states I should be able to guide you, or have friends that can give you advice on how to save.
I have friends who have helped people find $100,000+ in deducitons using these strategies. But even if you’re a beginner in business, there’s a lot that you can be doing to simplify your tax planning!
Feel free to ask any questions, and good luck!