Tax Planning for the Self-Employed
Freelancers, consultants, and small business owners face unique tax planning challenges. Without proper guidance, it’s easy to overlook tax deductions, miss deadlines, or overpay. At Thomas Cooper CPA PLLC, we specialize in helping small business owners with tax planning strategies to reduce tax burdens, improve cash flow, and maximize deductions. Here are some tax strategies to optimize your tax savings.
1. Quarterly Estimated Tax Payments
Self-employed professionals are required to pay quarterly estimated taxes to cover federal income tax and self-employment taxes. Estimated tax payments are due on April 15, June 15, September 15, and January 15 of each year.
Why Quarterly Payments Matter: Avoid IRS penalties by calculating estimated taxes based on last year’s income or projected earnings for the current year.
How much? Plan to set aside 25-35% of your income for taxes to meet these deadlines with ease and without major surprises. Depending on your overall income level, total taxes could be even higher.
2. Health Insurance Deduction for the Self-Employed
If you’re a self-employed professional, you may qualify to deduct health insurance premiums for yourself, your spouse, and dependents.
Health Insurance Premiums: This deduction can be taken above-the-line, meaning it reduces your adjusted gross income (AGI) even if you don’t itemize.
Self-Employed Retirement Savings: Consider retirement accounts like a Solo 401(k) or SEP IRA. These accounts provide a tax-deductible way to save for retirement, with higher contribution limits.
3. Plan for Self-Employment Tax
Self-employment tax covers Social Security and Medicare and is calculated at 15.3% of net earnings. Unlike traditional employees, self-employed individuals pay both the employer and employee portions.
Self-Employment Tax Deduction: Deduct half of your self-employment tax to reduce your AGI, even though it doesn’t reduce the tax owed.
Tip: Make sure to include self-employment tax in your estimated tax payments. This tax can surprise many first-time business owners when they are transitioning from a traditional employee role where they received a W-2 each year.
4. Should I Form an LLC and Elect S-Corp Status?
While many small businesses start as sole proprietorships, establishing an LLC and/or electing S-Corp status may provide financial and tax advantages as your income grows.
Limited Liability Company (LLC): Please consult your legal counsel for assistance with forming your LLC and understanding the liability protections.
S-Corporation Election: For higher-income individuals/businesses, an S-Corp may reduce self-employment tax by allowing your “reasonable compensation” payments to run through payroll and the remaining payments as distributions.
5. Use Accounting Software and Maintain Records
Good record-keeping is essential for small businesses. Use accounting software to track income, expenses, and estimated tax payments, which simplifies tax time and increases deductions.
Accounting Software: Software like QuickBooks, Xero, Wave, or FreshBooks organizes finances, creates reports, and provides tax summaries.
Document Receipts: Save receipts for expenses when running your business. Good documentation ensures accuracy and compliance.
Final Thoughts
Tax planning and recordkeeping is an essential part of running a small business and maintaining financial health. The team at Thomas Cooper CPA PLLC offers expert tax, accounting, and bookkeeping services, allowing you to focus on growing your business while we take care of your financial and tax needs.
