The Government is out to take your money! No, I’m kidding. But seriously, taxes for self employed folks are so important.
In this article, I take you through our biggest mistakes as well as wins with the good ol’ IRS. This is part of What no one tells you about starting a business: Taxes.
The 30% Rule: Taxes For Self Employed
If you take nothing else from this blog at least take this rule with you. As a small business you want to save at least 30% of your income/revenue for taxes. This is mainly for solo-entrepreneurs or passthrough LLC’s because they tax differently than C-corps or even S-corps.
When Leanna and I were getting 1099s, we should have structured it as an LLC to write things off differently, but we didn’t. EVERY dime that came in was taxed as personal income…. Let me tell you, that bill was so high it almost bankrupted us.
We had no clue that we were going to pay more than $10,000 in taxes that year… I will admit my naiveness in the fact that I thought the IRS/lawmakers would not tax small businesses so high.
I thought in all their infinite wisdom (sarcasm) the structure for taxes wouldn’t hurt us since we were so new to owning our own business.
The reality is that while the new laws are very pro-small business but you need to understand how to structure your business to mitigate that tax liability. Right now is a great time to start a small business from a tax perspective because the new laws are very generous.
You are able to write off start up costs! I didn’t realize you can structure it as debt on the company and label it as an asset on the balance sheet. This was big for us since we maxed out some credit cards to start our business.
I knew there would be a benefit to maxing out credit cards… besides the free drinks from the Southwest card.
Track your Mileage
I am still not amazing at this but if you’re in sales especially 1099 outside sales, track this. You will shock yourself at the end of the year how much this will help with your tax liability.
Get an app if you are bad like me. There is MileIQ which works really well or if you have Quickbooks, there is a way to track it there. When you are filing taxes as a self employed person, you need every edge you can get.
Hire a Bookkeeper or CPA
Don’t be like me and think you can do it all. Seriously, you aren’t good at it all. I know I am great at negotiating deals and prospecting new leads so why focus on something I am not good at?
Know your strengths and hire out the rest. Your business will grow faster and you will be able to sleep easier at night.
Real estate taxes are a little different. We keep track on a property/project basis which helps us understand what we are making on each deal. Quickbooks allows you to set it up this way to track expenses a little easier.
I then just turn it over to the CPA and let her do the rest! She has saved Leanna and I lots of money and it is worth every penny.
Do You Pay Yourself?
This is an important point because the IRS doesn’t mess around here. No one will believe you if you state you made $0 because you have bills and live somewhere, I hope.
However, you can structure it so that some of your expenses are business related and you are paying yourself only what you need to pay your bills each month. Some phone carriers have business specials if you change to a business plan rather than a personal one.
We saved some money by doing it but you will need to be in business for a year before AT&T will let you switch. It cut our bill down and now it is classified as a business expense.
I recommend going through all your bills and seeing which ones you use for business like WIFI and phone and seeing where you can add them to your business. Not everything will apply but if you are a home based business you can get away with more things.
After you go through this exercise, now pay yourself as much as you need to survive. As a self employed person growing their business you can eat a cup of noodles and keep hustling. Trust me, ambition and will to make it, will feed you.
Be Smart About Your Business
I know taxes for self employed folks are scary and hard to understand. Taking some of this advice and the advice from a professional is really important when you just start.
I struggled with a lot of these issues because I didn’t want to think about it and I wanted to focus on other aspects of my business. This is OKAY but you need to hire someone who can stay on top of it for you.
Be smart and set yourself up for success earlier rather than later. Trust me a tax bill of $10,000 will surprise you and make you feel sick as a small business.
If you liked this article, be sure to check out my other post about What No One Tells You About Starting a Business.
If you have any questions about taxes for self employed let me know and I’d be happy to help where I can! What are some of your tax mistakes or wins? Leave a comment so we can laugh/cry together!