In 2022, people could expect an average tax return of around $3,000. However, most people in the U.S. are employed by a company and collect a routine paycheck with tax deductibles and payments already built in. It’s different for people who are self-employed.
Depending on their tax planning skills, they may end up paying thousands of dollars around tax time. Or, they may collect thousands from the government. It all depends on how well they save and write off the things they use for work.
Keep reading below to learn how strategic tax planning for self-employed workers can save you thousands of dollars.
Financial Management is Part of the Job for Self-Employed Workers
When most people start working at a company, they sign paperwork that automates tax planning. Their company takes care of most of their paperwork. They take away the control for workers who may be able to save more money on taxes.
Being self-employed means you can take control of your own finances in ways few others can. You have full control over how your income is spent. It can go to things like an HSA or into retirement accounts, saving you money when tax time comes around.
You can also invest it in your own business, which could give you unique chances to save money on taxes. Self-employed workers need to focus on getting their work done and running a business at the same time. For them, financial management is part of the job.
Tax Planning Starts By Getting Organized
The first step when it comes to tax planning is to get organized. Self-employed workers need to keep meticulous records of their income. They need to be able to show how their money is spent, and who it’s going to.
Luckily, most self-employed workers also work from home, running online businesses. Since they’re mostly online, receipts and documents are automatically sent to their email. All they need to do is keep their emails organized.
They can set up notification systems with their bank for when money is deposited into their account. They can also set up systems in their email to automatically move emails showing expenses into a folder. With these simple strategies, they can maintain a basic level of organization.
A Tax Plan Should Include Ways to Save Documents
The best way to stay organized is to download documents as soon as you receive them. Financial management software now offers tools to automatically scan and collect information from documents. They can automatically calculate expenses and income using the documents you upload.
Self-employed workers can use software to save documents. Investing in a tool like this can save end up saving you thousands of dollars at tax time. It’s a worthwhile investment — something every self-employed worker should look out for.
Strategic Tax Planning Helps You Start Saving
After getting organized and collecting documents, it’s time to start strategizing. Generally, everyone can write off property taxes, mortgage interest and charitable contributions on their taxes. They can also usually write off medical expenses, or get tax credits for attending college.
People who are self-employed may also be able to get deductions for their internet and phone bills. If they have a home office, they may also be able to get a deduction for putting furniture in it. Traveling by plane or taking a road trip can also help you save on your taxes.
Only Pay What You’re Obligated To
People who are self-employed don’t have the advantage of a company deducting their paychecks to pay income taxes. They are usually responsible for it themselves. Some people like to open an entirely different account just so they can deposit money used to pay taxes.
However, most people don’t realize that spending money on their business can minimize their tax obligation. By working for yourself, your tax bill can actually be smaller than usual.
The trick is just to understand what the IRS accepts as a write-off. Generally, if you use something for work, you can write it off. That can include your car, your computer, or even your phone.
Minimize Obligations Through Charity and Saving
The best way to lower a tax bill is to give money to charity, and to save it. The IRS rewards some saving practices that set people up for success in the future. Depositing money in a retirement account may be able to reduce your tax bill, for example.
Generally, the money you deposit into a retirement account doesn’t count as income. The IRS won’t charge you taxes if it’s stored away to be used in the future. So, you can try to save as much as possible to reduce your income on paper and reduce the amount of taxes you owe at the same time.
You can also donate to local charities and nonprofits to reduce how much you owe on taxes. Charitable contributions are a quick and easy way to save money on your taxes. Just make sure you get a receipt for your donation!
Professionals Know What’s Deductible
The best way to save money on your taxes is simply to hire a professional. It’s almost impossible to know the tax code well enough to save thousands of dollars unless you spend time studying it. There are teams of professionals eager to help you navigate the tax code.
It gets more complicated each year too, as new laws are passed affecting how much people pay in taxes. But by developing a relationship with a team of professionals, they will get a sense of your finances and how those changes can affect you.
Stay Profitable With Tax Planning for Self-Employed Workers
Being self-employed means you get to take a break whenever you want. It means you can do any project you want, and charge clients however much you want. It also means that you are responsible for managing your own taxes, though.
The best way to avoid going bankrupt around tax time is to reach out to the experts. A quick consultation with a financial expert can reveal entirely new ways you can save money, while still paying your taxes.
You can schedule a consultation with our financial experts online!