Embarking on a self-employment journey—whether launching a side hustle or diving into freelance gigs—can be both exhilarating and daunting. As tax season approaches, many new entrepreneurs find themselves overwhelmed by the complexities of income and expenses. Navigating the requirements, from compiling 1099 forms to diligently tracking business-related costs, can lead to potential stress and unexpected expenses. However, it doesn’t have to feel this way.
Whether you choose to file taxes using online tax software or enlist the help of a certified accountant, these seven expert tips aim to alleviate the typical woes associated with self-employment tax preparation.
1. Digitally Track Your Receipts
One critical aspect of self-employment is ensuring you maximize your tax deductions. Keeping a meticulous record of your expenses can significantly reduce your taxable income. Expenses such as office supplies, travel fees, and other business-related costs can often be deducted.
A common challenge for new entrepreneurs is failing to systematically track their expenditures. For example, take photos of each receipt and email them to yourself, organizing them in a dedicated folder in your inbox.
Consider using accounting software to streamline this process. However, remember that finding a method that works for you is more important than using the latest software.
2. Don’t Overlook Small Tax-Deductible Expenses
Small expenses can lead to substantial tax savings, so don’t dismiss them as insignificant. Regularly incurring minor costs, such as purchasing supplies for business events, can accumulate and increase your potential deductions significantly.
3. Claim Your Startup Costs
Many entrepreneurs are unaware that they can claim expenses incurred before officially launching their business. Startup costs—such as market research, marketing expenses, employee training, and travel to meet potential partners—are eligible for deductions.
Familiarizing yourself with the eligibility criteria for these deductions can have a meaningful impact on your initial tax filings. If you’re uncertain whether an expense qualifies, retain all your receipts and consult with a tax professional for clarification.
4. Use Quarterly Taxes as a Check-in Tool
Unlike traditional employees, self-employed individuals must pay taxes quarterly. Failing to meet these deadlines can lead to penalties and interest on the owed taxes.
For the 2024 tax year, quarterly payments are due on April 15, June 17, September 16, and January 15, 2025. Setting calendar reminders can help ensure you allocate your finances accordingly. Additionally, consider placing these funds in a high-yield savings account, allowing them to earn interest while you save up for tax payments. Spreading tax liabilities throughout the year alleviates the stress of facing a hefty bill come April.
5. Explore Tax Benefits for Retirement Savings
Understanding the interplay between retirement planning and taxation is vital for every self-employed individual. Unfortunately, many entrepreneurs focus solely on their immediate income and overlook long-term savings.
Contributions to retirement accounts not only provide tax relief but also facilitate an easier transition to retirement when you’re ready to step back from your business responsibilities.
