As the dreaded tax season starts to set in, a lot of freelancers and small business owners are trying desperately to find every deduction and loophole to help minimize their tax obligations.
As you know, being blindsided by a huge tax bill is scary, and I’m sure you’ve experienced it at least once in your career. Fortunately, there are easy ways to avoid a large year-end tax bill and make tax time less scary.
Minimize your taxable income—that is—the portion of your income used to determine your tax rate by maximizing your deductions.
Track every expense, hold onto your receipts and keep a log of your mileage so you can use qualifying business deductions to lower your tax rate and make more money.
There are potentially hundreds of tax deductions available to entrepreneurs, but some of the lesser-known deductions you can take advantage of are Section 179, state and local taxes, and commissions.
Section 179 is a “true” small business tax deduction. It allows business owners who purchase qualifying property during the year to fully write off the purchase price rather than depreciate over time.
State and local taxes are generally imposed in the jurisdiction you do business in. The state and local taxes your small business pays are generally fully deductible on your federal tax return. Note: You can never deduct federal income tax as a business expense.
Commissions you pay to employees or third-parties for your small business are fully-deductible expenses.
As a general rule, it’s good practice to set aside 30%–40% of your earnings (before expenses) for taxes. Your effective tax rate will most likely be less than that but, then again, it’s always better to be safe than sorry.
However, ensure you don’t wait until the end of the year to pay your taxes. You may not know, but the IRS requires you to pay estimated quarterly taxes if you expect to owe more than $1,000 in federal taxes throughout the year.
It doesn’t matter if you’re a freelancer or run a small agency, guessing your tax obligation is hard.
Want to be more precise? There’s an even better way to set aside your taxes which doesn’t involve guesstimating.
It doesn’t matter if you’re a freelancer or run a small agency, guessing your tax obligation is hard. That’s why at Hurdlr, we’ve built a free tax calculator to help you break down your tax obligation by week, month, quarter or year.
Simply select your estimated hours billed per week, your hourly rate and expenses. Then, select the state you will be paying taxes in—and voila!
You’ll get a complete breakdown of your estimated take-home and taxes. Give it a try for yourself:
If the Hurdlr Freelance Tax Calculator does not appear, click here.
Your tax rate is based on your taxable income, which are your earnings minus deductible business expenses, such as insurance, mileage, qualifying meals, etc.
The more qualifying business deductions you track, the lower your taxable income will be, helping you pay fewer taxes and make more money.
If you’re ever unsure of your business taxes, the IRS has a wealth of tax-related information on their website. Check out the IRS’s Self-Employed Individuals Tax Center for more information. For a free resource on the most common business deductions, visit 99Deductions.com.