“The Freelancer’s Tax Toolkit: Saving Money at Tax Time”

Tax-Saving Strategies Every Freelancer and Small Business Must Use

As a freelancer or small business owner, taxes can take a big bite out of your bottom line. While you can’t eliminate taxes completely, implementing smart tax planning strategies can help you keep more of your hard-earned income.

In this comprehensive guide, we’ll explore 15 powerful tax-saving tips that every freelancer and small business should consider taking advantage of. Master these strategies, and you’ll be well on your way to maximizing your after-tax income.

1. Keep Immaculate Records

Meticulous record keeping is the foundation of tax savings for the self-employed. By maintaining thorough and organized records, you’ll be able to accurately calculate all your eligible business deductions and back up your figures if ever audited by the IRS.

Be sure to set up a system to track all business income and expenses. Save receipts and invoices, separate business and personal bank accounts, create expense reports, and have a dedicated record-keeping software like QuickBooks or FreshBooks. The more details you can provide, the more deductions you can claim.

Accurate records also help with estimating quarterly taxes, managing cash flow, monitoring the health of your business, and doing comprehensive tax planning. The time invested in record keeping up front can yield significant tax and financial benefits down the road.

2. Max Out Tax-Advantaged Retirement Accounts

Tax-advantaged retirement plans like Solo 401(k)s and SEP IRAs allow freelancers and small business owners to save for the future while lowering taxable income today.

The Solo 401(k) is likely the best option for solo entrepreneurs or businesses with no employees besides the owner and a spouse. Solo 401(k)s allow you to contribute both as an employee and an employer, with total contributions up to $61,000 per year for 2022 ($67,500 for those 50 or older). Meanwhile, SEP IRAs permit contributions up to 25% of your net business income, up to $61,000 annually.

Maxing out these accounts can slash your taxable income significantly. Be sure to explore them fully and use them as part of an integrated tax minimization strategy.

3. Deduct All Eligible Business Expenses

One of the best parts of being a small business owner is deducting legitimate business expenses to reduce your taxable income. Make sure you’re taking advantage of every allowable deduction based on your business model and activities.

Common deductible expenses include:

  • Office supplies and equipment
  • Professional services like bookkeeping or legal fees
  • Employee salaries and benefits
  • Advertising and marketing costs
  • Travel and transportation related to business activities
  • Phone, internet, and utility expenses
  • Insurance premiums
  • Interest paid on business loans and credit cards
  • Rent or lease payments for office space
  • Ongoing education and training

Deducting all applicable expenses properly can result in thousands of dollars in tax savings. Consult with a tax pro to identify all potential write-offs.

4. Claim the Home Office Deduction

Many freelancers and small business owners work from home, whether full time or as a hybrid model. If you operate your business out of your home, be sure to take the home office deduction.

To qualify, you must use a specific area of your home regularly and exclusively for business. You can then deduct a portion of home-related expenses like rent, mortgage interest, property taxes, utilities, insurance, maintenance, and repairs based on the square footage percentage used for business.

Home office deductions can be worth thousands per year, making it well worth setting up a dedicated workspace that meets IRS requirements. Just be sure to use the space only for business to avoid questions.

5. Track Mileage for Business Travel

Business-related travel is another significant tax write-off for the self-employed. For 2022, you can deduct either your actual vehicle expenses or take the standard IRS mileage rate of 58.5 cents per mile.

To maximize your deduction, keep meticulous records of mileage driven for business purposes in a vehicle log or app like MileIQ. Calculate the total miles and multiply it by the standard mileage rate. This adds up fast, especially for service businesses like caterers, contractors, realtors, etc.

You can also deduct parking, tolls, rideshare services, and other transportation costs related to business activities. Capture these expenses as you go to build your deduction.

6. Hire Family Members

Bringing family members into your business can provide personal and tax benefits. As long as the family member is doing legitimate work for your business, you can deduct their salary as a business expense just like any other employee.

Some common examples include hiring a spouse for administrative tasks, children for social media help, or siblings for services like graphic design or bookkeeping. Just be sure to keep proper payroll records like any other employee.

The family member must also claim the income on their taxes. But as long as they’re doing real work for the business, it’s a win-win tax strategy.

7. Leverage Tax Credits

Beyond deductions, small businesses can further reduce taxes through tax credits directly lowering your tax bill on a dollar-for-dollar basis.

Some examples of small business tax credits include:

Take time to research what credits make sense for your business situation and ensure you properly claim them. The tax savings can be substantial.

8. Make Quarterly Estimated Tax Payments

As a business owner, you typically don’t have taxes withheld from a paycheck like a W-2 employee. As such, you must make quarterly estimated tax payments on your income to avoid penalties and interest charges.

Estimated tax payments are due every quarter: April 15, June 15, September 15, and January 15. The IRS requires you to pay either 90% of your total tax bill or 100% of the prior year’s tax amount through quarterly payments.

Making timely estimated payments not only helps you avoid penalties but also manages your cash flow effectively throughout the year. Don’t let estimated taxes catch you off guard.

9. Don’t Be Afraid to Hire Tax Help

With all the complexities and responsibilities of running a small business, it can be tempting to take a DIY approach to taxes to save money. However, hiring a knowledgeable tax pro can provide huge value and more than pay for itself.

A tax professional can help you:

  • Navigate complex tax laws and ever-changing regulations
  • Identify overlooked deductions you may be missing
  • Structure your business in a more tax-efficient manner
  • Plan tax strategies to maximize savings both now and in the future
  • Avoid mistakes that could lead to audits and penalties

A good CPA will save you more in tax savings than their fees, giving you confidence at tax time. Their expertise offers peace of mind and allows you to focus on your business.

10. Plan for Long-Term Tax Strategies

Taxes owed each year are important, but also consider long-term tax planning strategies that could benefit your business for years to come.

Some examples include:

  • Incorporating as an S corporation – This changes how business income is taxed and may provide savings for some businesses.
  • Employee vs independent contractor status – Weigh the tax implications of bringing on employees vs contractors.
  • Accounting methods – Cash vs accrual accounting affects when income and expenses are recognized for tax purposes.
  • Buying business property – Carefully consider whether to expense or depreciate capital expenditures over time.
  • Estate and succession planning – Develop a tax-smart plan for transferring your business as part of your estate.

Meeting with a tax advisor annually can help identify the best long-term tax strategies to put in place well before tax time.

11. Make Charitable Contributions

Supporting charitable causes you’re passionate about while also lowering your tax bill for the year is a win-win. Some ways to integrate charitable giving into your business tax planning include:

  • Donating money directly from your business instead of personally
  • Donating inventory, services, or other non-cash assets
  • Setting up a donor-advised fund under your business name
  • Establishing a nonprofit foundation funded by your business
  • Sponsoring fundraising events, teams, or causes as a business

Be sure to track charitable donations closely. While tax deductible, charitable giving should also align with your business values and priorities.

12. Open and Fund an HSA

For small business owners who have a high deductible health plan, contributing to a Health Savings Account (HSA) can provide triple tax benefits.

HSAs offer:

  1. An above-the-line deduction lowering your AGI when you contribute.
  2. Tax-deferred growth on the funds just like a 401(k).
  3. Tax-free withdrawals for qualified medical expenses.

For 2022, you can contribute up to $3,650 for self-only HDHP coverage or $7,300 for family coverage. If over age 55, you can also make an extra $1,000 catch-up contribution.

Maximizing an HSA along with a high deductible health plan can be a wise long-term tax and healthcare savings strategy.

13. Use Tax Loss Harvesting

Tax loss harvesting involves strategically selling investments at a loss to offset capital gains and income taxes. This technique allows you to book losses to lower your tax bill while maintaining your overall investment portfolio and asset allocation.

As a business owner, you may have substantial capital gains from selling assets or investments held inside your business. By harvesting losses in your investment accounts, you can generate deductions to offset these gains and reduce what you owe.

Work with your financial advisor or CPA to model tax loss harvesting scenarios and improve your after-tax return.

14. Look Into the R&D Tax Credit

Many businesses are unaware that engaging in experimental research and development activities could qualify them for valuable R&D tax credits.

According to the IRS, “research” refers to eliminating uncertainty about the development or improvement of a product. “Development” means translating research findings into a new product or process.

Some examples that may qualify include:

  • Developing new technologies, formulas, inventions, or processes
  • Testing and refining prototypes or models
  • Clinical studies to obtain FDA approval for a new drug
  • Software development to improve internal systems/tools
  • Engineering to improve performance, reliability, or quality

Professional services like engineers, designers, software developers, and research scientists can help quantify credits.

15. Review Your Business Structure

The legal structure you choose for your business also impacts your tax situation both now and in the future. Periodically stepping back to assess if your current business structure makes sense can reveal opportunities for tax savings.

Some considerations around business structure include:

  • Sole proprietorship – Simplest structure with no distinction between you and your business for tax purposes. Income is reported on your personal return.
  • Partnership – Partners report their share of profits/losses on personal tax returns and avoid double taxation. General partners have unlimited liability.
  • S Corporation – Profits/losses are allocated to shareholders based on ownership percentages and taxed at individual rates. Reasonable salary is subject to FICA taxes.
  • C Corporation – Subject to corporate income tax rates. Double taxation for dividends distributed to shareholders. Better for raising capital long-term.

Your tax and legal advisors can help analyze the best structure for your goals, cash flow, and owner preferences.

Putting even a handful of these tax strategies to work can help freelancers and small business owners hold onto more of their hard-earned income to fuel future growth and prosperity. Don’t leave potential savings on the table. Partner with your financial and tax advisors to implement a plan tailored to your business. The tax and cash flow benefits will be well worth the effort.

Mdj301 97327 Emergency Fund B8842Ee3 7Ce1 49E4 9A72 691C044Fd723
"the freelancer's tax toolkit: saving money at tax time" 4

One comment

Leave a Reply

Your email address will not be published. Required fields are marked *