Savvy Tax Secrets of the Successfully Self Employed

This is a post for American readers but UK readers and others should still take note of the universal truths.

Being self-employed, you have an opportunity to reduce your taxable income, but, at the same time, be more financially independent. There is a vast range of tax benefits available to the self-employed, but not every solopreneur takes advantage of them. Let’s take a look at some of the savvy tax secrets of the successfully self-employed and see how you can keep on top of your books and reduce your payments to the IRS.

They outsource

A lot of self-employed people decide to do their own books, just to save a bit of money. However, by hiring an accountant or tax expert, they can save a lot more. Taxes are incredibly complicated, and the scope for saving is enormous, but you have no chance of finding these deductions unless you are prepared to pore through dozens of tax accountancy books and spend hours each week doing your books. For a small monthly payment on a tax professional, you can expect to save double, triple, or maybe even more – and it’s all money you can use to reinvest in your business.

They preempt IRS audits

Do not underestimate how important it is to keep a clean set of books. Every tax return day, you should assume that you will be chosen for an inspection, so make sure everything is accurate, and you have receipts and payment details for every single purchase. If you do end up getting a tax audit, it’s a good idea to get some representation. Tax and business lawyers will help you ensure that you keep your exposure to a minimum, and assist you in fighting a decision you feel wrong.

They set up an S-company

How is your business set up, and how much money do you earn? It might be worth creating an S Corporation, through which you can pay yourself dividends instead of a wage. The results can be enormous, depending on how much money you earn. When you are self-employed, you get taxed on every cent of your ‘earned income,’ which you pay yourself as a salary. But the IRS taxes dividends differently, and you can pay yourself 60% of a wage and 40% as dividends. So, let’s assume that you earn $90,000 a year through self-employment. By paying $50,000 as a salary and $40,000 as a dividend, you can save something like $6,000.

They defer income

You are also allowed to defer income to ensure you avoid higher tax brackets. It’s perfectly legal, and it can save you a small fortune. Let’s say you have already earned your limit for the year before it takes you into the next tax bracket. By requesting payment after the tax year ends, you will miss out on paying all that extra tax. As you can probably imagine, there are enormous savings to be made here, so always keep on top of your income levels and plan to receive payments strategically.

So, there you have it – some great ways to save yourself a considerable sum of money as a self-employed worker. Feel free to leave your own tips in the comments section below!