Tips for Self Employed Individuals to Save Taxes in 2022
Tax season is a tense and frustrating event for many self-employed individuals. You cannot postpone the declaration of income simply because you were busy. Everyone has to prepare and submit the tax before the due date each year.
Self-employed individuals are taxed similar to small and large businesses. But there are certain incentives for the self-employed that can result in lower taxes. Here are some tips that can help you to save taxes in the 2022 tax year.
1. Control Timing of Invoices
Self-employed individuals can control the timing of invoices sent to customers to lower the tax bill. Consider sending the bills near the end of the tax year to reduce the tax bill. You should tell your customers to pay at the end of the year to reduce your taxes.
2. Control Timing of Expenses
Another tip to lower the bills is to expense rather than capitalize property. In addition, you can delay the assets till December 31 to lower the tax bill through depreciation of the asset.
You can also make advance payments of certain expenses to lower the tax bill.
Remember that the cost of inventory is not deducted until you sell the final product. So, you cannot buy inventory to lower the bill.
Know about Self Employment Tax
Self-employment (SE) tax is additional tax for self employed individuals. Individuals who are self-employed have to pay additional taxes that are generally paid by an employer such as Medicare and Social Security taxes.
The Schedule SE of Form 1040 can help in calculating the self-employment taxes. The taxes must be paid in addition to the operational income.
Retirement Contributions
Self-employed individuals can reduce the tax due by deducting the retirement contributions. The incentive has been set by the government to encourage people to fund their own retirement account.
The retirement contributions can significantly reduce your tax income. It serves as the top tax breaks for self-employed individuals. Consider opening IRA or 401(k) accounts to make the most of the incentive.
The 401(k) plan is recommended if you are the sole employee of your business. Self employed initials are allowed to deduct up to $20,500 retirement contributions from the taxable income in 2022 tax year. Solopreneurs who are 50 or older can deduct up to $27,000 contributions per year.
In addition, solopreneurs are also allowed to contribute up to $61,000 of their income to retirement plans such as the Simplified Employee Pension Plan (SEP-IRA).
Write -off Business Deductions’
Self-employed individuals are allowed to reduce taxable income by writing off certain business expenses. You should take advantage of this incentive to reduce your taxable income. A
The IRS allows solopreneurs to deduct expenses that are associated with the business. You can reduce necessary and common expenses incurred in running the business.
You can deduct utilities expenses from your taxable income. In addition, the cost of internet service can also be deducted from the taxable income. You can also deduct transport related expenses that incurred in relation to the business.
Depreciation of certain taxes and property can also be deducted from the taxable income. The IRS allows you to deduct the value of certain property and equipment. Again, it’s recommended that you contact a professional tax consultant to know about the specific business expenses that can be deducted from your taxable income.
Estimated Taxes
Self-employed individuals should estimate the income earned during a particular tax year. You can submit IRS Form 1040-ES to make quarterly estimated tax payments.
Continued Education
The IRS also allows self-employed individuals to deduct expenses incurred in continuing education. You can deduct qualified work-related education expenses. Some of the education related expenses that you can deduct from your taxable income include.
- Transportation fees
- Lab fees
- Books
- Tuition
- Supplies
- Other related expenses
Remember that you can deduct the expenses only in the case of qualifying education that helps in maintaining or improving skills related to your trade.
The tax incentive is not applicable to education for changing careers. Moreover, this tax incentive is also not applicable if you are working to maintain minimum requirements for a particular trade. However, you can qualify if you have taken courses that lead to a degree. You can look at IRS Publication 970 for more information on qualified education plans.
Creating an S Corp
Self employed individuals can save tax amount due by creating an S corporation. Registering the S Corp with the IRS will allow you to reduce the tax liability. This type of corporation allows you to deduct a salary from the income. You can distribute the net profit to yourself or invest the amount to expand your business.
Remember that income in excess to the salary is subjected to income tax. But the amount is not subject to the employment tax.
Let’s suppose that you earn an income of $200,00 during a tax year. If you are the sole owner of your business, the entire amount is taxed. But if you register your business as a S Corp, your salary deducted from the income will not be taxed. You should talk with a qualified accountant to know more about the benefits of registering your business as an S Corp.
Hire an Outsource Accounting Service Provider
You should consider hiring an outsource accounting provider for bookkeeping entries. This will allow you to focus on preparing accurate tax returns. In addition, you can give more time to your business that will result in improved profitability.
Maxim Liberty offers professional bookkeeping service providers. We are the premier outsource bookkeeping service provider in the US. Our accountants can make bookkeeping entries as per the generally accepted accounting principles (GAPP). You can rest assured that the bookkeeping entries made by our accountants will comply with all relevant federal and state requirements.
For more information about our outsource bookkeeping services, you can contact us by dialing (703) 957-6938.
