Tax season may be the highlight of the year for traditional workers, but for entrepreneurs, this is a season of debt – nothing more. If this is your first year filing self-employment taxes, you may be overwhelmed by the amount of money you’re expected to pay from your income. Nearly every first-time entrepreneur goes through this eye-opening experience, and unfortunately, there is no way to fix that now. With that in mind, there are some steps you can take to avoid self-employment tax debt next year if you start preparing right away. Follow this guide to minimize your costs next tax season.
Save Money In Advance
Ideally, you should save 20-25% of your income for taxes. Self-employment tax rates change from year to year, but they usually hover between 13% and 16% in the United States. Every time you get a check in from a client, put part of it away in a special tax account. Then you will have money available when it comes time to pay your taxes next year.
Pay Quarterly Estimates
Another way to avoid having a huge tax bill at the end of the year is to pay quarterly estimates to the IRS. You essentially fill out a mini-tax return every three months and pay an approximated tax rate based on your earnings. At the end of the year, all you have to worry about is your last quarter’s payment, not an entire year’s worth of tax debt. If you have overpaid when that time comes, the government will issue you a tax refund check that you can use toward next quarter’s taxes.
Keep Receipts For Tax Deductions
Self-employed individuals are at a high risk of getting audited, so you need to make sure that you store all of your financial records for seven years after you file your taxes. It’s also important for you to keep these year by year so you can get as many discounts as possible. Every business expense you have can be taken off your taxable income, including rent payments for an office space or utility bills for any area used in the business. Take advantage of as many tax deductions as possible to reduce your taxable income and your tax debt as a whole.
Find A Good Accountant
While it is entirely possible to file self-employed taxes on your own, the process is much more complicated than filing a standard Form 1040. You may need to file a Schedule SE, Schedule C, and other forms in addition to your Form 1040, depending on the type of business you run. If you are worried about messing something up or missing out on a huge tax break, find a good accountant that works with entrepreneurs and small businesses. The money you pay for accounting advice will be covered by your potential savings.