Tax season is probably the most important time for independent consultants to think like business owners. This especially means being smart about how we handle our money. Our motivation is simple: pay as little tax as possible, ideally without triggering an audit. We all should be asking ourselves (and our accountants) this question:
As a business owner, what can I do to lower my tax bill?
The answer is to maximize your tax deductions for this year and take steps to reap tax saving benefits every year. This article touches on the first and explores the second in depth.
For the Near Term: Take Standard Business Owner Deductions
You don’t have to have a legal business structure like an LLC or S-corp to take advantage of standard business-owner tax deductions. Sole proprietors qualify for deductions too, even if you only consult part time.
Standard business-owner tax deductions include deducting your home office and a portion of your utilities; parking, tolls, and mileage to and from business meetings; books and subscriptions; office supplies, shipping, and postage; retirement contributions, and probably even health insurance premiums on your personal tax return. Obviously, every person’s situation is different so talk with your tax professional. In the meantime, before meeting with your accountant I recommend reading “Top Tax Deductions for Your Small Business” by Stephen Fishman, J.D., author of the book Deduct It! Lower Your Small Business Taxes. Other useful resources are from the IRS, “Deducting Business Expenses” and “Publication 535 (2016), Business Expenses.”
For the Longer Term: Maximize Tax Deductions
When you are self-employed, investing some time now can save you tens of thousands in tax over the years. The two key ways are setting up your own business-owner retirement plan and using a health savings account. It takes a bit of effort and some fiscal discipline to maintain, but doing so provides a double reward of lowering your taxable income (and related taxes due) while increasing your personal savings. Let’s look at these in more detail. [Read more…]