It’s been said that only two things in life are certain: death and taxes. It may be necessary to add a third: procrastination. According to the Internal Revenue Service, roughly 25 percent of American taxpayers wait until the last two weeks of taxpaying season to prepare their returns.
But why? You don’t want to be bogged down with boring forms when you’re trying to make money and build your business. You also don’t want to find out you owe Uncle Sam more than you thought — and not be ready to make that payment.
Take a look at these tips on how to ease the burden at tax time and manage your finances better. You owe it to yourself.
Take Advantage of Common Deductions
One perk of being a freelancer, contractor or other self-employed worker is that there are many deductions — even ones you may not have considered — that can reduce the burden at tax time. Remember to keep all your records, set up a business bank account and to not go overboard with deductions (be honest with the government here!).
The most common deductions that will immediately benefit you include your home office, health insurance costs, contract labor expenses, and retirement fund savings (like a contribution to a traditional 401k). Other deductions that can help include:
- Advertising expenses
- Business travel costs
- Office supplies and rent
- Repairs and maintenance
- Legal and professional services
Think of any expenses that you had to make for your business. Many of these can be deducted from your income, and thus reduce how much you must pay in taxes.
Should You Pay Taxes Quarterly Or Annually?
The simple answer is both. If you carry on a profession or business as an independent contractor or sole proprietor, belong to a partnership or union that carries on a trade or business, or are working for yourself in some way, you are considered self-employed. That means you have to pay your taxes as stipulated by the IRS.
Hence, you must not only file an annual return, you must also pay estimated tax quarterly. Note that taxes include an income tax as well as a self-employment tax, which goes toward Social Security and Medicare.
If you paid less than $1000 in taxes last year, then you can still pay annually (quarterly payments aren’t required). However, if your self-employment income is going to rise significantly, it’s best to pay quarterly so that you’re not stuck with a hefty payment at the end of tax season.
So how do you make sure you’re making accurate payments each quarter? You can base a lot of what you pay this year off what you paid in taxes last year. If you paid a total of $3,600 in taxes last year and expect a similar income this year, it’s advised to pay $900 quarterly. Use Form 1040-ES to figure out a good estimate of how much you’ll owe at the end of each quarter and for the total year.
Software to Help You Stay on Track
When you’re running a business, keeping track of finances and taxes can be time-consuming. And if you want to hire someone, it can be unnecessarily costly. Lucky for you, mobile apps can make the process seamless — and save you money.
For instance, apps can help you track, understand and manage your business expenses throughout the year. There is also tax software available specifically for self-employed individuals that can help you maximize tax savings each quarter.
In the end, reducing the burden at tax time is a matter of you consistently managing your income and business expenses, and also making every effort to prepare yourself for payments. Understanding self-employment taxes and using advanced software certainly reduces the amount of time and stress involved. But the key is to stick to a plan. And don’t procrastinate.
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