End of year tax tips for the self-employed
One of the most daunting aspects of being a small business owner or freelancer is trying to figure out how to navigate bookkeeping and taxes. While it may seem overwhelming at first, it really is just a matter of being organized and surrounding yourself with smart people who “nerd-out” over things like deductions, receipts and contracts.
We rounded up some of the best and brightest accountants and tax advisors to help you get ready for tax season. Don’t wait for 2019 to get your business in order! Putting these tips in place before the end of the year may just help decrease your tax bill for next year!
Use the calendar to your advantage
You may want to push some expenses to next year, if you have the chance.
The difference between 1099 and W2 work is now huge with the new tax law. There are no deductible expenses if you are considered an employee or W2. So assuming you are 1099 contractor person, then there are a lot of deductions. If you think this year wasn’t as big, hold off paying bills if possible to next year. On the flip side if this year was huge, then remember if you charge something in 2018, it is deductible even if not received until 2019. So the end of the year is a good time to get more equipment or supplies. Also, if you hire other 1099 people, pay them before year-end to get a bigger deduction this year.
— Eric Heckman, Heckman Financial and Insurance Services IncLook to see if you have any outstanding vendor bills so you know how much you still owe. Similarly, check for any remaining customer invoices to find out what you are owed and ensure you receive payment. Depending on your particular situation, you may want to push to collect on open invoices or pay promptly before the end of the year.
–David Ambrogio, consultant for Tower Books, a small business bookkeeping and consulting firm
Pay Estimated Tax based off of 2018 income statement
To avoid penalties, make sure you pay off any estimated tax before the end of the year
Self-employed taxpayers should prepare a 2018 income statement. An income statement takes the form of revenue less ordinary & necessary business expenses. The taxpayer or their CPA will need an income statement to prepare the 2018 tax return. In addition, the taxpayer should make sure they paid in sufficient estimated taxes to cover their expected 2018 federal tax liability. Self-employed taxpayers should pay estimated tax payments in the amount of the payroll tax rate (15.3%) multiplied by net income plus the taxpayer’s applicable marginal income tax rate multiplied by net income.
–Brian Thompson, www.BrianThompsonLaw.com
Contribute to your retirement plan
You are contributing every year…right?
A simple and proven way to cut your taxable income is to take some of your money and put it into a retirement plan. This could be a traditional 401(k) you maintain through an employer or through a SEP IRA for the small business you run.
-Mike Savage: founder, owner, and CEO of 1–800Accountant
Did you hire contractors? Get those 1099s in order!
If you hired other people, make sure you file the right paperwork!
1099-MISC Filing Requirement — It is not uncommon for a solopreneurs to engage the services of another individual who does not meet the definition of an employee. When that occurs and you pay him or her $600 or more for the calendar year, you are required to issue him or her a Form 1099-MISC no later than January 31 of the subsequent year. You are also required to file copies of the 1099-MISC with the IRS by January 31. Failure to do so can result in penalties ranging from $50 to $270 per form 1099-MISC.
Form W-9 — It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.
-Lee Reams Sr., BSME, EA, Chief Content Officer at TaxBuzz and CountingWorks
The IRS requires you to report the details of third-party transactions when the cumulative total reaches a predetermined threshold for a specific expense category. If you do not transmit the form, you risk a penalty of $520 for not filing the paperwork with the IRS and not sending it to the vendor (based on 2018 rates). When in doubt, prepare and send the 1099 form to avoid incurring the fine.
–Thomas J. Williams, EA co-founder of Deducting the Right Way℠
Get documentation for purchases and leases
When you make large purchases decide whether you want to claim their cost or depreciation over time
As the year-end approaches, solopreneurs and freelancers should gather documentation of their equipment purchases and leases. You should be able to get this documentation from your equipment vendor and year-end balance sheet.
You’ll need this documentation to claim the Section 179 deduction. Section 179 lets you deduct up to $1 million on equipment in the year of purchase/lease, instead of depreciating them year-over-year. This can help boost a small business’s cash flow. Virtually any type of business equipment, machinery, and vehicle is eligible for Section 179, and any business that spends $2.5 million or less on equipment can take advantage (after that, the deduction is smaller).
–Priyanka Prakash, Fundera.com
Check your Mileage
Even when you work at home, your mileage can be deductible!
Solopreneurs can deduct mileage if the trip was for legitimate business purposes. For people with offices outside the home and even shared office space, the mileage to and from the office is not deductible — these are considered commuting miles. The miles that should be tracked include trips to visit clients and prospective clients, trips to visits suppliers and contractors, and trips for business related errands like to the bank or stores for business supplies.
I usually recommend using the standard mileage, but taxpayers can use actual expenses. There are more complications and they must have a record of the non-business miles as well. The mileage rate is $0.545 for 2018, and $0.58 for 2019.
Even a solopreneur who only drives to the bank to deposit checks from their client and to the store to buy printer paper can easily accumulate 200 miles during the year. That is $109 deduction. Because self-employed people pay income tax and Self-employment tax (essentially Social Security and Medicare contributions), that $109 can easily be worth $41 in federal taxes alone (15.3% SE tax and assuming 22% income tax).
The reason to mark down mileage on December 31 (or January 1) is because a percentage of any excise tax paid can be deducted even when using standard mileage. Having the year end mileage each year provides the taxpayer with the total miles driven during the year. For a taxpayer that paid $300 in automobile excise tax for the year and 30% of the total miles driven were for business, there is an additional $90 deduction ($300 * 30%). It is small but they all add up.
–Beth Logan, EA www.kozlog.com
Donate to charity!
The deductions can help off-set a hefty tax bill. Plus you’re helping those in need!
Making a charitable contribution at the holidays is extra special — and a good tax-saving move to boot. Spend a few hours to clean out your garage, closet, spare bedroom, or storage unit. Then donate some of these unnecessary items to qualified charitable organizations this holiday season and write off on your taxes the donations when filing with the IRS. Just remember to keep proper documentation.
-Mike Savage: founder, owner, and CEO of 1–800Accountant
Review Your Business Structure
Different legal structures (Sole-prop, LLC, S Corp, C Corp, etc) have different advantages. Make sure you have the right one for your business.
Consider incorporating your business to be able to take advantage of more favorable tax treatment that the S-corporation structure, in many situations, would provide compared to a Sole Proprietorship. Income from S-corporations are not subject to self-employment taxes, which generally add up to approximately 15%. Income from Sole Proprietorships (Schedule C) on the other hand is subject to 15.3% self-employment taxes up to approximately $130,000 income. A simple restructuring in the entity type can save small business owners thousands of dollars.
The new tax law starting with 2018 years taxes will give most flow through entities (S-corporations, LLC’s, Sole Proprietors, Partnerships) a 20% tax deduction. To qualify, most service-based businesses, such as accountants, lawyers, doctors, brokers, athletes, consultants, and many other service-based businesses, must have taxable income, as a single taxpayer, below $157,500 and $315,000 for Married filing jointly taxpayers. If your income is above the limits, consider deferring income by contributing to IRA, SEP IRA, Simple IRS, 401(k) or profit sharing.
–Emil Abedian, Founder/CEO of AnchorBookkeeping and Founder of CPA firm Abedian + Totlian
The biggest tax changes in the new law for small business owners are the lower corporate tax rate of 21 percent and a potential 20 percent pass-through deduction that starts in 2018 for self-employed, sole proprietors, partnerships and S corporations.
For service businesses involving categories like doctors, lawyers, financial advisors and freelancers, the taxable income of the professional involved, according to the IRS, must be below $207,500 (for a single individual) or $415,000 (married, and filing jointly) for that person to qualify.
Because your 2018 tax return is the first one impacted by the Tax Cuts and Jobs Act of 2017, you must review your tax strategy before year-end. Don’t procrastinate until the last minute. You’ll want to review five key areas with your Tax Advisor, including state deductions, home office deductions, automobile deductions, retail inventory deductions and ways to reduce income legally by shifting income to your children.
-Tom Wheelwright, CPA, CEO and Tax-Free Wealth Author http://wealthability.com
Look to Next Year
Planning ahead is essential for small business growth
Make sure to have your bookkeeping updated so that you can meet with your CPA before the end of the year for proper tax planning. Operative word being “planning.” Meeting with your CPA without an accurate and reliable profit and loss statement is meaningless because your CPA will not be able to do a proper evaluation and help you save in taxes. And waiting until March or April will also not help because it is already too late at that point for most tax planning tools.
–Emil Abedian, Founder/CEO of AnchorBookkeeping and Founder of CPA firm Abedian + Totlian
Last on your year-end bookkeeping checklist should be planning ahead for the New Year. From finding ways to improve your cash flow to maintaining better books and strategizing ways to grow your business, the best way to hit the ground running in the New Year is to identify any problems you;re experiencing, set new goals, and outline the steps you should take to put you on the path to success.
–David Ambrogio, consultant for Tower Books, a small business bookkeeping and consulting firm.
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Originally published at www.workathomefaq.com on December 19, 2018.
