If you’re fed up with how much of your money is going towards taxes, then this list is for you! I’ve compiled 10 of the easiest ways to cut taxes in 2023.
As a self-employed individual, you have the ability to deduct 20% of your net profit automatically off the top. This is called Qualified Business Income, and affects self-employed individuals up to a certain dollar amount. So, as long as you’re not making millions of dollars, then you can probably benefit from this deduction!
You may already be aware of the home office deduction – but did you know you have two different options? Be sure to take a look at both and choose the one that gives you the greatest deduction amount. The simplified method is where you write off $5 per square foot of office space in your home. The detailed method is where you take your office space / home percentage (divide your office space square footage by your total home square footage) and multiply that by your total utility cost for the year.
There are two different options when calculating vehicle expenses. The most common method is keeping track of your mileage. To use this method, you’ll need to keep a detailed log for IRS purposes. It helps to use a smartphone app like MileIQ that tracks your trips for you (and then you can later categorize them into business or personal). The other option is to keep track of your actual expenses.
If you take a client to lunch or dinner, or have a meeting with a prospective client over a meal, you can deduct half of that amount.
If you have to travel to meet with a client in another city to get more business for yourself, then you can write off those expenses.
If you’re self-employed, then any health insurance that you’re paying for yourself or your family, as long as they’re not covered by an employer, can be written off on your 1040. You can also write off building insurance, cyber insurance, liability insurance, etc.
When you start your business, you may incur costs such as the purchasing of equipment, training, consultant fees, accounting fees, etc. These can all be written off on your taxes.
If you don’t get the word out, then you won’t have a business! So be sure to do some advertising, and don’t forget that you can deduct your advertising costs!
If you’re self-employed, you can take a deduction for your contributions towards your SEP or IRA.
Many professions require continuing education, and you can deduct the expenses for tuition, books, and fees related to that education.
What type of business (or business entity) is right for you? There are 4 types of business: Sole Proprietor, S Corp, C Corp, and Partnership.
A lot of people will tell me “I’m an LLC”. An LLC can also be one of the 4 business types I just mentioned.
Many people are under the impression that if you are a sole proprietor LLC, you have a lot of protection from liability and from getting sued. That is not necessarily true, because those laws are dependent on what state you live in. They do provide some protection, but not as much as an S Corp or C Corp.
When you become an LLC, or you start up as a business owner, a lot of your clients or vendors may ask for a W9. It’s very important that you know how to fill this out correctly. You’ll need to select which type of business entity you are. Underneath it says, Limited Liability Company, and if you’re also an LLC, you’ll need to check which kind you are. Questions? Call us at 814-636-0205.
When you’re an LLC and you really wanted that for the liability protection, you may want to consider going the next step up and becoming an S Corp.
The advantages of being a sole proprietor are the ease of opening up your own business. You just need to get an EIN number (tax number) from the IRS, and you can do that easily online.
Another good advantage is that you can be your own boss by setting your own hours and deciding which clients you want to work with. Another advantage is ease of operation – it’s very easy to operate your business & get your taxes done.
The disadvantages to being a sole proprietor are that an LLC may not provide liability protection that you expect – it depends on your state laws. Another disadvantage is that you have your self employment tax. That adds to marginal income tax by 15.3%. Also, you must pay quarterly estimated taxes, because of the pay-as-you-go tax system that we have. Those quarterlies are due due April 15, June 15, Sept 15, and Jan 15 of the following year. Check out my video where I explain more about quarterly taxes, and what happens if you don’t pay.
Another disadvantage is that it is difficult to raise capital. If you go to the bank for a loan, they want to see your tax return and how much money you made. When you’re first starting out, you don’t usually make a lot of money. Also, be careful if you choose to create a business doing something that you enjoy, for example making jewelry. If you don’t make a profit 3 out of 5 years, it will be considered a hobby rather than a business.
Also, there is no succession to a sole proprietor business. It’s difficult to pass on because a lot of times it is based on your passion for something. Your children may not have the same passion for the same things. A lot of times they go off and do their own thing.
If you decide to go to the next level and create an S Corp, you definitely have the limitations on liability. The S Corp is considered a corporation, so that keeps your business separate from your personal. As an S Corp, your business can continue on if you decide to sell the business. Also, it’s much easier to raise capital through the bank.
When you’re an S Corp, you pay yourself a salary instead of having the self-employment tax. If you are doing the work, you’ll receive payroll wages, which will protect you through unemployment and Worker’s Comp.
One disadvantage is that there is only one class of stock. Also, you have payroll obligations – You have to pay the federal government the FICA taxes and Social Security taxes for whoever you hired. A payroll company can help you with that – I recommend Van Cleve Inc, a local Erie company.
Another disadvantage is the complexity of business and the extra requirements of business meetings, tax requirements, and bookkeeping. Also, you have to track your basis in the entity.
Those are the advantages and disadvantages of a sole proprietorship and an S Corp. If you have any questions, please call me at 814-636-0205.
Retirement is an exciting time! But what about taxes? The first couple years of retirement, there will be a transition from earning W2 wages to taking retirement income. It’s taxed differently, especially when you take out Social Security. The first year you receive Social Security you should meet with a tax professional so you understand how it will be taxed. The first couple transition years, you may end up paying thousands in taxes that you didn’t have withheld. You can avoid that by doing some tax planning six months ahead of time.
Sometimes it is taxed. If you have a lot of other retirement income, it could be taxed up to 85%. If you don’t have any taxes withheld, you can get hit with a big tax bill.
When you retire, you may have Social Security, Pension, 401(k), IRA. Talk to your tax professional about how much you need, so you can plan for the taxes, and plan for saving, for a big purchase like a car, or for house remodeling and repairs.
Roth has already been taxed; traditional has not. If you have a lot of Roth, you don’t have to worry as much about taxes. If you have mostly Traditional, you may end up owing a lot of taxes. If you do tax planning before you take that first retirement year, you’ll be in a much better place.
At 73, the government is going to require that you take a certain amount of money. You need to find out that amount before it happens so you can properly plan.
If you’re in or near Erie, PA, give me a call to set up a meeting! 814-636-0205
When you’re a 1099 contractor, you have decide how to pay your taxes. The IRS expects you to pre-pay (or pay-as-you-go). Generally you’ll be expected to pay every 3 months. In PA, you have federal, state, local, and possibly a city tax.
I came up with a spreadsheet (XLS | CSV | PDF) for my clients that shows the dates that the quarterlies have to be paid, and who to pay them to. Generally, if you have a 1099, you didn’t have any taxes withheld. When you make that income, it’s very important to take 20-25% of that income and put it in a separate account that you don’t touch, so you can pay it to taxes.
I’ve had clients tell me, “I had to live off that money.” That may be true, but at the end of the year, you still have to pay those taxes. If it ends up being over $1,000, you may get a 10% penalty on top of that. If you don’t pay it at all, IRS will come after you with penalties, failure to file, and interest. All of those things will add up to more than what you originally owed in taxes.
People who are still paying back the IRS because they didn’t pay their taxes will tell you – it can take years, and years, and years.