We are fast approaching the end of the tax year for most of the world, so in today’s Finance Friday article I am going to give you 5 helpful tax tips all solopreneurs should know.
As just about any self-employed person knows, calculating and paying tax can be incredibly stressful.
Even if you hire an experienced accountant, managing your tax situation is a little different for self-employed people.
The tax rules and amounts payable can vary widely between different countries, but there are some basic rules which apply to all.
Being prepared ahead of time is always a good position to be in.
So, these five tips can help you manage and pay your taxes with fewer headaches.
Let’s get started.
1. Estimate Your Income
The first tax tip for solopreneurs is to estimate your annual income.
When you estimate income, you can also estimate how much you will need to pay in taxes.
Find out which tax band will apply to your estimated income level.
When you know the percentage tax payable for your income, you can plan ahead.
Depending on your tax authority, your tax band may also change the frequency of tax payments.
Your payments may be quarterly, half-yearly or a one big annual lump sum.
If you have been consistently working self-employed for some time, estimating your income should be pretty easy.
Look at how much you are making now and try to factor in how much you expect to increase throughout the year.
If you’re new to the solopreneur game, it can be more of a challenge.
For a new business, start out by thinking how much you want to earn.
Your main goal should be to earn an income which supports your desired lifestyle.
Once you know your desired income, it then becomes pretty easy to work out your tax situation.
2. Plan Ahead
As you earn money, put aside the percentage which will need to be paid in tax.
It is not your money.
It has never been your money, and never will be.
You are keeping this money safe for the tax authorities, until they ask for it.
So don’t even touch this money.
Put it straight into a high-interest earning savings account.
That way, you will always have the money ready for when the tax payment becomes due.
The benefit of this plan is you get to keep any interest which that money earned while you were keeping it safe for the government.
As a solopreneur, there may be additional “employment” payments which you need to make.
When you are someone else’s employee, these are often seen as deductions on your payslip.
For example, in the UK, every employee pays National Insurance.
Although not strictly considered a tax, National Insurance goes to paying for Healthcare and Social Security.
You need to find out which (if any) ’employee deductions’ apply to solopreneurs in your country.
Sometimes you must make these payments regardless of your actual earned income.
So, save this money too as soon as you earn it.
It’s important to plan ahead so that you are not left scrabbling for cash whenever tax season rolls around.
Have the mindset that this money is never yours.
Save it the moment you get it.
This will make it much easier to pay taxes whenever they are due.
3. Organise Invoices and Receipts
Make sure to have a thorough accounts organisation system.
This includes physical receipts, email receipts, and other digital receipts.
Also keep copies of every invoice or bill you have issued to a customer.
You will not be able to prove your earnings or expense costs if you do not have the proper record of all business transactions.
As well as copies of the documents, create a spreadsheet in which you can log all monies in and out.
If you have the discipline try to record every transaction as it happens.
If that isn’t practical, then set aside time every week to complete your spreadsheet.
If you leave your spreadsheet till the end of a month, then the task can be overwhelming.
Plus you might have mislaid a receipt or two by then.
Keeping a running spreadsheet gives you an accurate picture of how your solo business is performing.
You will also be ready when its time to file your taxes.
Accountants charge by the hour, so the less time they spend digging through your paperwork, the cheaper your accountancy costs.
It’s also a great idea to automate as much as you can.
Apps like Expensify make it quick and easy to scan and capture expenses on your mobile phone.
You can then link Expensify to your spreadsheet using Zapier which will file each new receipt for you.
Automations like this ensure you organise everything, even when you are too busy to focus on meticulous details.
The other final benefit of keeping accurate financial records as you go?
You will be confident that everything is in place if you are ever subject of a tax audit.
4. Take Advantage of Tax Deductions
As a business owner you get more tax deductions than regular employees.
These deductions can include features of your home office.
Deductions may also extend to your internet and phone bills if you use them for your business.
Even specialised publications, subscriptions, and car mileage can be tax deductible.
Take advantage of these tax deductions to pay as little as possible in tax season.
Tax rules change all the time and while you may find some information online as your business grows and becomes more complex, I recommend consulting with an experienced accountant.
Accountants know a lot about self employment tax deductions.
When it comes to taxes, you literally pay your accountant to save you money.
Over the years, my accountant has saved me tens (perhaps hundreds) of thousands in deductions; a significant return on the investment I paid him in fees for his knowledge.
5. Increase Retirement Contributions
As solopreneurs, we always need to think about our retirement plan.
If you are starting your solopreneur career young, retirement may seem a long way in the future.
But thanks to the magic of compound interest, the earlier you start to save, the faster your money will grow.
But saving for retirement can also have a significant and immediate tax benefit.
In many countries, you can deduct retirements investments before tax.
This means, the more of your earnings you can put into your retirement fund, the lower your annual tax bill will be.
While the total amount of pre-tax retirement contributions may be limited by law, aim to contribute the most you can.
Not only do you reduce the amount of tax you need to pay now, you are building your nest-egg for the future.
Paying tax is stressful for anyone, but it is especially stressful for solopreneurs and other self-employed workers.
Incorporate these tax tips into your tax plan so that you’ll be more prepared and knowledgeable when the tax man comes calling.