When you are self-employed or run your own business, you have a lot to do and a lot to think about. It’s easy to fall behind on filing a tax return for your business or end up owing back taxes. Many small businesses have been hit hard by COVID-19 and are either struggling to pay the business taxes owed or find the time to file. If you owe back taxes or are behind on filing, Tax Resolution Group can help. We also have some smart strategies to share with you on how to lower your taxable income if you are self-employed, so you end up owing less taxes.
Taxable Income from Self-Employment
Being self-employed can be wonderful. You are in control of how hard you work and achieving your success. You enjoy the flexibility and freedom of determining your own schedule and workspace. And best of all, you decide what to do with the profits from your business.
While the COVID-19 pandemic has hurt some businesses, it has also created conditions for others to thrive. If you’re in that lucky position, you may have more taxable income from self-employment than expected. Therefore, you may owe more in taxes that you have in the past. Use the following tips and strategies to help you lower your taxable income so you keep the amount you owe in self-employed income tax as low as possible.
Contribute to a Self-Employed Retirement Account
Specialized retirement plans offer huge benefits for people who are self-employed. You can shelter significant amounts of money through specialized retirement accounts, such as a SEP-IRA. You can save for retirement and also reduce your taxable income from self-employment by opening one of these accounts. SEP-IRAs are similar to traditional IRAs. However, the main difference is that SEP-IRAs are designed for people who are self-employed.
You can also use a solo 401(k) to shelter more of your self-employment income. It takes a little more effort to manage a solo 401(k), and you’ll need to maintain good records or work with an accountant. A solo 401(k) is very similar to a traditional 401(k), but it is designed for those who are self-employed. The contribution limits for solo 401(k) plans are significantly higher, and that’s the most important benefit for how to reduce your taxable income if you are self-employed. By maxing out the higher contribution rate for a solo 401(k), you can reduce the amount you owe in self-employed income tax. You also control how the money is invested.
Open a Health Savings Account
Health care can be a sizeable challenge when you are self-employed. Privately purchased health insurance plans are expensive and the choices can be confusing. One option is to purchase a high deductible health care plan. If you choose to go with a high deductible plan, you can open a health savings account (HSA). The amount of money you divert into the HSA reduces your taxable income. You contribute pre-tax money into the HSA and the account and interest are tax-deferred until age 65. It’s important to note that you must have a high-deductible health care account to be eligible for an HSA. Medicare recipients are not eligible for HSAs.
Defer Self-Employment Income to the Following Year
One of the great things about being self-employed is that you decide when you get paid. You can determine when you invoice and receive payment for your services, so you may determine that you would benefit from deferring end-of-year payments to the following year. This reduces your current year income, so it’s another way to reduce your taxable income if you are self-employed.
This is a short-term fix. The amount you defer will be part of your taxable income for the following year, but it may make sense if you expect to earn less in the coming year.
Using Tax Sheltered Accounts for Investment Income
Another way to lower your taxable income if you are self-employed and also have investment income is use tax sheltered accounts. You can keep investments that generate income, such as bond funds and stocks that pay dividends, in your IRA. This lets you lower your taxable income so you pay less taxes and keep more of what you earn long-term. Keep in mind, though, it also means you will be taking home less income now, so it may not work for you if you need the extra money now.
If you have questions or need more advice about how to lower your taxable income, contact Tax Resolution Group.
We Help with Back Taxes
If you owe money to the IRS, are behind on your taxes, or are worried that you won’t be able to pay your taxes this year, we can help. Tax Resolution Group specializes in fixing tax problems. We offer proactive tax services including tax resolution, tax planning, tax preparation and audit support. We offer in person, virtual service or socially distanced service, and we are ready to help you. Call us for tax help today at 941-413-2799 or Request a Free Consultation.