Here are some tips to keep in mind…
Self-employed professionals, contractors, and consultants are responsible for taxes and employer contributions for Social Security and Medicare. You have to consider earning extra revenue to pay the self-employment (Social Security and Medicare) tax. The self-employment tax rate is 15.3% of net profit. For instance, $10,000 in profit costs $1,500.00 in self-employment tax. The rate drops to 2.9% once the profit reaches $137,700 in 2020. This is important to remember when pricing out consulting engagements, or contractor’s jobs.
Accounting we will go
Thinking about starting your business on a shoestring? Great! However, think again about keeping your receipts in a shoebox. It is more effective and better business to keep a detailed report of your financial activities. Not only will this save you headaches in the long run but it can help you manage your business for the future. For instance, you can generally determine how much you spent on business expenses, generate a list of non-paying clients, or estimate your tax obligations for next quarter.
Accumulate expense receipts
Getting receipts together is a nuisance. They usually end up in car visors, or laundered once they’ve been left in pants pockets. All those $10 receipts for coffee and muffins you shared with clients can add up to a nice tax deduction at year-end. Same for lunches, gasoline for business travel, and items you buy at the office supply store. Remember that under current tax law, these deductions apply to businesses and self-employed individuals, not employees.
Getting mileage out of it
The Internal Revenue Service allows you to deduct 57.5 cents per mile traveled for business (2020). This often adds up to a hefty deduction, especially for salespeople and contractors traveling between work sites. Keep a calendar or notebook in your car, and tally the daily miles, identifying the clients or work sites visited. Your mileage log is the best evidence if you find yourself in the middle of a tax audit. Remember that under current tax law, mileage deductions apply to businesses and self-employed individuals, not employees.
Consider a payroll service
For a reasonable fee, a payroll service will create your paychecks, deposit tax money with the federal and state governments, and file all the necessary quarterly paperwork. All you have to do is track your employees’ hours and call them in. Left to your own devices, a missed payroll tax payment can become your biggest IRS nightmare.
Don’t base decisions solely on write-offs
Just because the IRS allows a generous depreciation deduction for a new truck doesn’t mean you should buy it. Does your business need a new truck, or other piece of equipment? The word write-off doesn’t mean the government is paying for the item. If you spend $30,000 on new equipment, the tax savings could be as much as $10,000. However, you’ve still had a $20,000 impact to your cash flow.
Don’t co-mingle funds
Your personal expenses should be paid from a personal bank account, and your business bank accounts and business credit cards should be used for business purposes only. Of course, if there is money in the business account, and the mortgage is due, it’s tempting to write that check. However, to stay under the IRS radar, it’s important to transfer money to your personal bank account to pay personal bills.
Save for retirement
You can borrow money to buy a home, finance a car, higher education, new appliances, just about anything. But you can’t borrow money for retirement. And even though it may be 10, 20, or 30 years away, the time to act is now. There are tax advantages for contributions to your 401(k) or an Individual Retirement Account (IRA). And it doesn’t have to be a big amount. You can set up monthly deductions from a bank account, or even weekly payroll deductions, which you won’t even feel.