Entrepreneurship comes with tons of perks and bonuses. You have the ability to set your own hours, work from anywhere in the world, and set your own rules. What also comes with this newfound entrepreneurial freedom is the seemingly daunting task of handling your taxes and your finances. The tax advantages and rules differ greatly if you’re used to working a regular 9-5 and filing an ordinary 1040.
An as an employee, filing your taxes is simple and straightforward. Your employer deducts the right amount each pay period based on your exemptions providing by your w-4. Come tax time, you really don’t have too much that you need to worry about.
However, as an entrepreneur, things are quite different. You don’t have a set amount of taxes withheld throughout the year, you get all of your money upfront, leaving you to deal with the government later.
This may sound like a lot of trouble/work, however, there is a good side to this. As an entrepreneur, there are several tax advantages that you can utilize that are only available to business owners. These tax deductions can greatly reduce your tax liability and save you tons of money come tax season.
What are these tax breaks? Let’s dive in!
As always, this information is for awareness. You should still consult a certified tax professional as needed.
5 Tax Tips Every Entrepreneur Should Know About!
1. Actually Pay Yourself
This might seem like a no brainer. However, tons of entrepreneurs pay themselves last, if they even pay themselves at all. The way your business entity is set up will determine how you should pay yourself in the most tax advantageous way possible. Remember in a previous article we talked about some of the benefits of using a salary + bonus option vs a larger direct salary?
Choosing the right entity is important!
To maximize your tax benefits and to also protect yourself and your personal assets. You should separate your personal finances from your business finances. Utilize a separate business bank account and operate your payroll / pay yourself from that account. Not only does this separate your finances in the case of legal action but it also makes it easy to keep a clean paper trail of money in vs money out when it is time to file.
2. Deduct your home office and related expenses.
One of the most well known yet underutilized tax deductions, deducting your office space at home and the expenses related to your office space should be a no brainer. However, many entrepreneurs fail to utilize this deduction. If you work from a home office, you must take this deduction even if you ignore the rest of them.
What does it take to qualify for this deduction?
Simply put, you must own or rent a living space that you call home and designate a portion of this residence solely to your business. You can still do business or work from other locations as long as you spend a “substantial or significant” time at your home office, you can still take advantage of the deduction.
Using the regular method for home office deductions, you can deduct expenses such as mortgage interest, home insurance, repairs, and standard depreciation. The larger your home/home office, the greater the tax benefit.
3. Deduct those business expenses!
You can and should be able to deduct a lot more than your home office! As an entrepreneur, you will encounter numerous expenses that can be deducted if properly accounted for.
To fully maximize these deductions, I would suggest consulting a CPA or visit Tax Experts if you’re in Detroit. This will involve a fair bit of research since there are so many possible deductions with specific guidelines.
Some of these deductions include but are not limited to, food expenses and entertainment expenses( taking a client/customer out to a baseball game or some other promotional event). The thing here is that the IRS doesn’t publicly broadcast this information. You will have to go find the documentation on business expenses yourself!
This list includes all of the various expenses that can be deducted and the rules that govern how to use them correctly. Definite block off some time and review this information and highlight some of the expenses that you naturally incur that you should be deducting come tax time.
4. Deduct your health insurance.
One of the cons of becoming a full-time entrepreneur is that you no longer get to enjoy the benefits of subsidized health insurance from your employer. This can be a huge change for most entrepreneurs fresh out of the 9-5. However, this significant expense can be written off!
You are eligible to write-off any out of pocket expense for dental, medical, and long-term care insurance. But wait, it gets better! You can also deduct insurance costs paid for yourself, your spouse and your dependents. Doesn’t sound so bad, does it?
5. Save big by saving for retirement.
Did you know that you can obtain a huge tax deduction/write-off just by saving for retirement? If not…now you know!
If you have a traditional IRA, you can deduct your contributions up to a certain dollar amount. If you’re under 50 you can deduct up to $5,500 per year and up to $6,500 if you’re 50 or older. If you go over these limits you will be taxed on the amount that you go over. This only applies to traditional IRAs. Roth IRAs are not tax-deductible.
Doing this is a win-win. On one hand, you’re saving for your future and on the other, you are actively reducing your tax liability!
These are just a few quick tips to help you this tax season! If you’re in the Detroit area, stop by Tax Experts, we can lend a helping hand with your taxes this season.