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How to Save on Taxes When You Are Self Employed

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By Kayla Matthews

Self-employment means a lot of freedom and flexibility in your work — but being your own boss isn’t cheap. Unlike a worker on business payroll, you’re responsible for paying your own Medicare and social security tax in the form of a 15.3 percent self-employment tax.

It’s a big expense, and one that leads many freelancers to think about alternative career options. Fortunately, it’s possible to seriously cut down on those extra taxes that you have to pay.

The tax code is full of lines that provide deductions for business and the self-employed. While the 2017 Tax Cuts and Job Act nullified a number of these tax write-offs, there are still many write-offs you can use to lower your taxes. Below, we’ll cover the best ways to save on taxes when you are self employed, plus other strategies you can use to save on taxes.

1. Take Advantage of Above-the-Line Deductions

Since 2017, standard deductions have been higher than usual, even for single filers. The size of these deductions, combined with the labor needed to track expenses, means some taxpayers skip keeping track of potential deductions. It may seem like there’s no way you can spend enough to have itemized deductions that beat the standard deduction.

Even if you don’t itemize your deductions, you can still write off certain expenses on your tax return.

Above-the-line deductions, sometimes called business deductions, reduce your adjusted gross income (AGI). Your AGI is the sum total of your annual income, including wages, business income, capital gains, unemployment and so on.  You can take these deductions even if you don’t itemize.

There is a variety of above-the-line deductions that you can use to cut down your AGI. For example, you can use retirement plan and HSA contributions. You can also deduct many self-employed business expenses, like office rent, utilities and legal fees.

2. Deduct Travel-Related Expenses

Business travel is a deductible expense, so long as it lasts longer than a work day, requires you to sleep or get rest and takes place out of your tax home. You can also write off many travel-related expenses.

The cost of transportation to and from your destination is deductible. So is the cost of transportation at your destination. You can also write off meals and lodging — so long as they’re not considered “lavish” or “extravagant,” per IRS guidelines.

Typically you can only write off 50 percent of the cost of meals, but there are exceptions that let you go over this limit.

3. Save Purchases for the End of the Year

IRC Code Section 192 allows taxpayers to deduct the cost of personal property in the year you put it into service — so long as you use it more  than 51 percent of the time for your business. So long as you buy a business asset and start using it by December 31, you can probably write off the expense on your tax return for the year.

Normally, you’d have to depreciate the expense over several years, splitting up your savings.

4. Write off Interest

If you’ve taken out a business loan, interest paid on those loans can be fully deductible, so long as you’re spending loan funds on business expenses.

There are some exceptions to this rule. For example, the loan needs to come from a real lender. Some banks and financial groups offer loan options for self-employed professionals. If you take out one of these loans, you can write off the interest on your tax return. If you borrow money from a family member or friend, however, you can’t write off the interest.

5. Write off Publications and Subscriptions

Any business-relevant publications you buy or subscribe to can be written off on your taxes.

Not all subscriptions can be written off. You may have a hard time justifying a subscription to your local paper, for example. Relevant industry publications, however, can be written off. Reference materials are also a deductible expense.

6. Deduct Your Home Office

Have a space in your home dedicated to work? You can write off the value of that space on your taxes.

The space has to be dedicated to work, however. If it’s serving another purpose — like a bedroom — it won’t be deductible. The IRS may request documentation of your home office space.

Even if you can’t write off the costs of your work space, you can generally write off the cost of utilities. Your internet connection and phone line are may count as fully- or partially-deductible expenses.

Tracking and Applying These Deductions

You can connect personal finance software to your bank account and automatically log expenses. This can help you keep track of your annual expenses.

You may also want to start looking at long-term tax saving strategies. If you don’t have a HSA, retirement fund or self-employed defined benefit plan, opening one can provide additional opportunities for savings.

 

 

About the Author: Kayla Matthews writes about communication and workplace productivity on her blog, Productivity Theory. Her work has also appeared on Talent Culture, MakeUseOf, The Muse and Fast Company.

 

Photo by StellrWeb on Unsplash

3 New Coronavirus Tax Credits that SMB’s Should Know About

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By Kayla Matthews

To keep businesses afloat during the coronavirus crisis, the federal government launched several new tax credits for employers of all sizes. These three coronavirus tax credits are designed to help you manage the financial burden of covering sick and family leave for your employees, as well as any government-mandated closures you may have complied with.

Employee Retention Credit

The employee retention credit is “designed to encourage businesses to keep employees on their payroll.” The tax credit, which is refundable, is 50 percent of up to $10,000 per employee in wages paid by your business. You can claim it so long as you’ve been impacted by COVID-19 and aren’t a small business that’s taken a small business loan.

For the purpose of the credit, impacted means one of two things:

  1. During 2020, your business has been fully or partially suspended by the government due to COVID-19 for the quarter, or
  2. During 2020, your gross receipts were below 50 percent of the comparable quarter in 2019.

If your gross receipts rise above 80 percent for a comparable quarter in 2019, you’ll no longer be considered impacted by COVID.

The Employee Retention Credit is not to be confused for the Paycheck Protection Program, another federal program designed to encourage businesses to keep employees on payroll during the COVID-19 crisis. You cannot receive both the Employee Retention Credit and a PPP loan.

The Paid Sick Leave and Family Leave Credit

These two credits are designed to compensate employers for employees who are unable to work due to COVID-19.

As an employer, you are obliged to provide employees who are unable to work (or telework) due to COVID-19 with paid sick leave for up to two weeks — whether they are sick, have been advised to self-quarantine or are caring for someone who has been advised to self-quarantine. You are also entitled to a fully refundable tax credit that’s equal to the cost of that paid sick leave.

Employees are also entitled to paid family leave if they are unable to work because they are caring for a child due to the closure of schools and childcare providers. You are also entitled to a fully refundable tax credit for the cost of this family leave.

In both cases, the paid leave will be equal to two-thirds either their regular hourly wage or minimum wage, whichever is higher. These leave payments won’t affect the employee’s standard rate of basic pay. This means that, for example, if an employee is paying for family life insurance, and the value of that insurance is based on rate of basic pay, taking sick or family leave shouldn’t affect the coverage provided.

How Do I Receive These Credits?

You can be immediately reimbursed for the credits by reducing the required deposits of payroll taxes by the value of the credit. To do so, you’ll need to calculate the size of the credit you’ll receive for the preceding quarter and apply it to your business’s Form 941, Employer’s Quarterly Federal Tax Return.

If your tax deposits aren’t enough to cover the credit, you can request an advance payment from the IRS using Form 7200, Advance Payment of Employer Credits Due to COVID-19. You can submit Form 7200 any month during the month following the quarter for which your claim is being made.

The IRS hasn’t yet put forward  timetable for when these advances will be sent out, however. If your business needs funds urgently, it may a be a good idea to look to other sources of funding.

 

About the Author: Kayla Matthews writes about communication and workplace productivity on her blog, Productivity Theory. Her work has also appeared on Talent Culture, MakeUseOf, The Muse and Fast Company.

Featured Photo by Kelly Sikkema on Unsplash

What All Businesses Should Know About 2020 Taxes

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By Kayla Matthews

 

tax form with pen

Knowing what’s new with tax specifics this year helps you feel well-equipped when filing your returns. Here are some crucial things to keep in mind as you prepare your 2020 taxes.

The Federal Tax Deadline Is Now July 15 for U.S. Filers

Perhaps the most important thing to know for planning purposes is that you have a little more time to get your returns filed. The Internal Revenue Service (IRS) announced that it moved the 2020 filing deadline forward three months. Due to the COVID-19 pandemic, It’s now July 15, rather than April 15. You do not need to request an extension to avail of the extra time.

Moreover, this new deadline also applies to estimated taxes that some self-employed professionals would have paid on April 15, 2020. Bear in mind, though, that you still need to get the second quarter’s payment in by June 15, 2020. States have taken a variety of different approaches with their tax deadlines. Some opted not to change them, while others permitted extensions. Check for the details associated with your state to avoid late payment penalties.

You May Qualify for COVID-19-Related Assistance

The coronavirus government stimulus package is a much-discussed topic these days. It will see a large percentage of taxpayers getting $1,200 deposited into their bank accounts. There is also an assortment of other forms of assistance that may apply to you. The IRS set up a dedicated page to inform people of what’s available and how to apply for it.

Employers should keep in mind that their businesses may be eligible for the Employee Retention Credit. It provides a tax credit for up to 50% of the qualifying wages paid to employees. Moreover, there are refundable tax credits given to small and medium-sized businesses to cover the costs of paid sick and family leave associated with COVID-19.

The IRS spells out the details of each assistance program on its website. Instead of assuming you qualify for something, take the time to read the information to check.

Deducting Expenses Is Not Always Straightforward

One of the most time-intensive tax tasks for many people involves deducting their expenses. That’s because tight parameters dictate what you can or cannot deduct. The lack of clarity may also exist regarding whether something is a tax or not.

One recent instance involved the Rhode Island Department of Transportation tried to collect toll fees exclusively from commercial trucks to fund roadways improvements. A court ruled that the word “tax,” as found in the Tax Injunction Act (TIA), does not include tolls.

However, the IRS has standard mileage rates you can deduct for business-related driving. In that case, the permitted deductions include tolls, as well as parking fees. The standard rate for business travel is 57.5 cents per mile this year — down from the 58 cents allowed in 2019.

You may also wonder if it’s possible to deduct expenses associated with working from home due to the coronavirus pandemic. The surprising answer is that you cannot deduct the item as an employee, but your company can.

Some companies pass the benefits onto workers. Section 139 of the federal tax code allows tax-free reimbursements of “reasonable expenses” to employees due to disasters, including the COVID-19 pandemic.

Sustainability Credits Remain in Effect

The tax incentives for energy-efficient commercial and residential buildings will stay in place through December 31, 2020. Additionally, if you buy qualifying energy-efficiency equipment (such as solar water heaters and geothermal heat pumps) for your home, the credits for those are available through December 31, 2021. However, the percent of the cost eligible for a tax break takes a step-down approach.

If you begin using the equipment after 12/31/2019 and before 1/1/2021, the tax credit is 26%. However, it drops by four percentage points if you put the purchases in service from 12/31/2020 to 1/1/2022. The credits apply to existing and newly constructed homes that you own. Rental properties do not qualify.

Some People Can Dip Into Their Retirement Savings Without the Usual Penalty

Another recent development associated with COVID-19 tax relief allows qualifying parties to access their retirement savings early without the 10% penalty usually incurred. Affected individuals, such as those diagnosed with COVID-19 or caring for a spouse who has it, can withdraw up to $100,000 in savings under that arrangement.

Also, if you have a 401(k), the new stipulation allows six months of taking loans from an account equaling $100,000 or 100% of the account balance, whichever is lower.

Numerous New Tax Developments

This overview shows why it’s crucial to learn about this year’s tax changes before starting to file. Getting informed is a practical way to ensure you know about all the breaks and incentives applying to you or your enterprise.

 

About the Author: Kayla Matthews writes about communication and workplace productivity on her blog, Productivity Theory. Her work has also appeared on Talent Culture, MakeUseOf, The Muse and Fast Company.

 

Photo by Leon Dewiwje on Unsplash

Important news about Internet sales tax changes

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small business and internet sales tax changes

By Bill Fay

Small Businesses and Nexus Rules

If your business is involved in online sales and you don’t have a legal representative interpreting whether you should or should not be collecting sales tax, now would be a very good time to “lawyer up!”

Not satisfied that business owners have enough head-spinning rules to deal with on a daily basis, Congress has come up with something called the Marketplace Fairness Act (S.336). It passed through the Senate 75-24 on March 23. The vote is purely symbolic because it was non-binding and only indicates the Senate supports the legislation.

A similar bill exists in the House. Interpreting the wherefores and whereases of this legislation is going to take experienced legal skills … and some really good guesswork! More on what “might” lie ahead in a moment.

First, let’s take a look at the rules as they currently exist. They are a tad confusing, but not nearly as complicated as what may or may not be coming, based on the whims of Congress.

Right now, you must collect and remit state taxes based on your “business nexus,” a term subject to some interpretation, but which generally speaking means you sold to someone in the state where you have a physical presence. That physical presence could be your office, property you own or lease, or people you employ to do work in that state.

Court-Ordered Interpretation

That is based on a 1992 Supreme Court ruling (Quill Corp. vs. North Dakota) that said that a business had to be physically present in a state before that state could require it to collect taxes. Having customers in another state was not enough.

The Quill Corp. vs. North Dakota ruling originally involved catalog sales. Internet sales weren’t around in 1992, but once they sprang up, it was decided the same rules would apply.

When Internet sales boomed, some states created a gray area in the law by interpreting “physical presence” their own way. People realized that they could buy items online, especially large appliances, and avoid the sales tax. The $2,000 refrigerator at Amazon cost $2,000. If you bought it down at the street and added sales tax, it was $2,120. States were losing out on that $120.

That did not sit well with state governments, but there was little they could do. Twenty-four states did form a group that tried to make online retailers voluntarily collect and remit the sales taxes, but that has had very limited success. Their average collection for the period from 2005 to 2010 was a mere $30.7 million, or about $5 million a year.

E-commerce growth kept skyrocketing, but the states knew they had to wait for Congress to come up with a law that gave them business nexus over Internet transactions across state lines. It took a while, but the federal government appears to be coming through with the Marketplace Fairness Act.

New Rule is a Doozy

The MFA would allow states to force Internet retailers to collect state and local sales taxes, if they do more than $1 million in sales, and remit the money to the appropriate place, just like the brick-and-mortar stores do. States would have to implement provisions of the Streamlined Sales and Use Tax Agreement (SSUTA) or meet the minimum specifications spelled out in the SSUTA, including providing retailers with free and regularly updated software to collect and remit sales taxes.

Huh? As tangled as that is, it only gets more puzzling as you go along.

There are approximately 9,600 taxing districts across the United States, each with its own requirements for registering and filing. There also are an incredible number of definitions of what is a taxable good and what isn’t, and let’s not forget the special “tax-free holidays” some states sponsor.

Imagine trying to keep up with all that! Or, as the legislation suggests, hoping your state provides “free and regularly updated software” to do so.

This purpose behind this is a noble one. It’s aimed at leveling the playing field for brick-and-mortar stores, which complain that customers window shop merchandise in their outlets, then go home and buy the item over the Internet because they don’t have to pay sales tax.

States obviously lose money when that happens. How much do they lose? Estimates vary, with one source putting it at around $12 billion for 2013. Whatever the amount, you know no government wants to miss out on a chance to spend/waste that kind of tax money.

What’s Next?

So what should small business owners selling online do? And no, punting is not an option.

For now, all you can do is check your business nexus – i.e., Do you have a physical presence in that state? If you do, collect sales tax when you sell to customers of that state … then sit back and wait on Washington.

The good news is, given the pace of play in D.C., you should have plenty of time to find a lawyer who can effectively interpret whatever Congress ultimately produces.

Author’s Bio: Bill Fay is a staff writer for Debt.org. Bill has a wide-ranging background in reporting and writing, including for daily newspapers and magazines and also for public officials.

What All Freelancers Must Know About Tax Season

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By Adria Saracino

To the new and veteran freelancer alike, tax season can be a time of dread. While there are many tax benefits to be taken advantage of, it can be difficult to navigate the maze of regulations surrounding each deduction–not to mention you have to make sure you’re sending all of the correct forms to the correct places.

But it doesn’t have to be a complete headache — not with the right resources. That’s why we’re recommending the seven tips below, which cover all of the essentials, as well as the documents available in this extensive tax resource center. With these two sources, you’ll find answers to all of your most burning freelancer tax questions — and a few you didn’t even know to ask.

1. Know What Taxes You’ll Need to Pay

If you’ve ever worked directly for an employer, you’re probably used to paying income, social security and Medicare taxes. As a freelancer, you’ll also need to pay a self-employment tax. This is because you are your own business, and therefore have to match your tax contributions in the same way your employer would have, for a total contribution of 15.3%. That’s 12.4% for social security and 2.9% for Medicare tax.

You’ll also have to pay an income tax, for which you can use your last year’s rates as a guide, or you can check the IRS site for income bracket cutoffs. Lastly, it’s important to check with your state revenue department and municipality to determine whether or not they are expecting taxes from you as well. For most freelancers, you will make the bulk of these payments in the form of estimated taxes at the end of every quarter — that’s the 15th of every January, April, June and September — using form 1040-ES.

2. File the Correct Forms

Every time a new client hires you as a contractor, they will have you fill out a W-9. That’s so that when tax season rolls around, they can send you a 1099, which will state the amount of money they’ve paid you. Note: You won’t receive this form for total income of less than $600.

You may be used to filing a 1040A or 1040-EZ form; as a freelancer, you’ll have to switch back to the original 1040 form, as you’ll be reporting self-employment income. To account for taxes related specifically to your business you will also need to file a Schedule C, though those with relatively simple businesses like writers or graphic designers will be fine filing a less complex Schedule C-EZ.

Lastly, you will need to calculate your self-employment tax on Schedule SE form.

Note: These forms and types of taxes paid will differ slightly for freelancers who have filed as a corporation — something all freelancers should consider for tax and liability purposes — but that is an article unto its own.

3. Take Advantage of Deductions

Now for the fun part! There are a number of juicy deductions available to freelancers. That said, it’s important to know the difference between what counts as a business lunch and what counts as a “ridiculous splurge that will anger the IRS.” And we can’t say it enough: keep your receipts.

  • Office Supplies: From the furniture in your office to that colorful new packet of Post-Its, office supplies are fully deductible. However, if you’re just starting out, you may want to brush up on the differences between current and capitalized expenses.
  • Advertising and Internet Expenses: Billboards, fliers, leaflets, online ad campaigns, and the internet connection itself. Add the expenses up, and deduct away.
  • Professional Services: Whether you’ve employed a bookkeeper to keep track of your finances or you’ve taken a continuing education course to further your career, the costs you paid are all deductible.
  • Insurance: If you have business insurance, it’s fully deductible. Health insurance is as well on form 1040 as an adjustment to income.
  • Home Office: You can deduct a percentage of your rent and utilities, based on the size of your home office.
  • Travel: If you travel to clients, track your mileage for a deduction at the 2012 rate of 55.5 cents per mile. Travel for business trips is also deductible, as are any meals and hotel rooms related to business travel.

This is just a sampling of the deductions available. You’ll find a more extensive guide here.

4. Be Wary of Audit Red Flags

One big caveat to all of these deductions: the IRS keeps its eye on freelancers for any kind of fudging, so you’ll want to make sure you’re not setting off alarm bells. A few common triggers include:

  • The Home Office Deduction: This is by far one of the most commonly abused deductions, partially because the regulations concerning just what you can and cannot claim are both strict and a little difficult to understand. The gist of it is that the area you claim as a home office needs to be used exclusively for business, and you need to stick quite tightly to obvious borders. Read more about these regulations in IRS Publication 587.
  • Mileage: While we highly recommend you deduct mileage, if you use your car for both business and pleasure, you’ve got to do a good job of tracking and separating the two. Keep in your car a little book with columns for start and end mileage, date, and description.
  • Meals and Entertainment: Again, deducting for this is perfectly acceptable, as long as it’s within the realm of reason. Deducting for a good meal with an important contact is fine, but perhaps not if it costs several thousand dollars. Use a good dose of common sense to avoid this trigger.

5. Sign Up for Electronic Filing

Repeat after us: filing your taxes electronically will make your life infinitely easy. Through the Electronic Federal Tax Payment System, you’ll even be able to file your estimated taxes. It takes a little time to set up, but will be well worth it in the end.

6. Use Tax Software Made for Businesses

Likewise, tax software can make your life so much easier, as can accounting programs that automatically create reports and forms for you. File for free through the IRS, or compare a number of good tax programs here.

7. Hire an Accountant

You’re in business for yourself, and you may very well enjoy being totally self-sufficient. But hiring an accountant can mean outsourcing many of these steps. It can also ensure you’re not missing anything, especially in terms of new tax laws. Lastly, a good accountant will find you deductions and loopholes you could have never known existed (unless you wanted to read through a mass of byzantine tax documents in your free time…). All of these things make hiring an accountant an expense that pays for itself, at least in the beginning of your freelance years. Just make sure to do so early before they book up.

Take-Away

Filing taxes as a freelancer can be complicated, but doing so allows for numerous personal benefits. Take the time to learn the regulations and get to know the forms so you can take advantage of all there is to offer and also cover all of your bases.

Still Confused? Check Out This Tax Checklist

Author’s Bio: Adria Saracino is a marketer, blogger, and occasional freelancer. When not consulting on best business practices, you can find her writing about style on her personal fashion blog, The Emerald Closet.