Best Practices To Optimize Your Self Employment Taxes

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StrategyDriven Managing Your Finances Article | Best Practices To Optimize Your Self Employment Taxes | EntrepreneurshipIt’s great to be your own boss and this is the reason that a large number of people are picking up freelancing. Even those in full-time jobs are embracing it as a side hustle. While you can make good money from a part-time or full-time freelance project, you are expected to pay your taxes as well. To start with, you need to be aware of the fact that freelance income is taxable just like any other income is. Also, it will definitely impact how you file the taxes and pay them up. So it is better to understand and plan on the A to Z of taxes on freelance income to ensure that you don’t get into trouble with the IRS. Here are the basics that you must know.

What are the taxes on self-employment income?

Freelancers pay the same income tax rates as employed persons do. Additionally, they are considered independent contractors and are taxed on the net self-employment income. This income is calculated by deducting the tax-deductible business expenses from the gross receipts. This is the tax that takes the extra bite out of the freelancers’ earnings. It includes both Medicare and Social Security taxes. If you were employed, your employer would pay half of these taxes. However, you have to pay both the halves yourself in the form of the self-employment tax as a freelancer.

What are the deductions you can claim?

While you calculate the taxable self-employment income, you will also want to know about the deductions that you can claim. These deductions matter a lot as they can reduce your tax burden to a considerable extent. According to the IRS, you can claim deductions on the entire expenses which are ordinary and necessary for the operation of your business, just like it is allowed for any other business owner. Specifically speaking, you can claim them for a home office, advertising and marketing, computer equipment and software, office supplies, utilities and travel, and business meals. However, you must maintain proper records and documentation for these expenses.

What is the minimum earning that makes you liable for paying taxes?

Obviously, you would want to know whether you actually need to pay taxes on your freelance earning. According to the federal laws, you will be liable to pay them if your earning from freelance work exceeds $ 400 in a given year. The tax attorneys from Travis W. Watkins Tax Resolution & Accounting Firm suggest that you should receive these earnings in a separate saving account for simplifying tax calculations. Further, expect a significant portion of your freelance check to cover the taxes because you have to pay income tax as well as self-employment tax.

How should you keep your taxes on schedule?

Since you are your own boss, the responsibility for keeping your taxes on schedule is yours as well. The IRS prefers a pay-as-you-go basis and this is also simplifying things for freelancers. Ideally, you should send in the tax payments throughout the year, which can be done by remitting estimated taxes. The good thing about doing so is that you will not face a cash crunch in April. You will have to pay up all final tax payments by the April 15 deadline. The better way is to pay the estimated taxes on the quarterly dates of April 15, June 15, September 15 and January 15 (of the subsequent year).

What are self-employment tax rates and thresholds?

Another fact that matters is the tax rate and threshold because you would obviously want to know them as well. The self-employment tax is just like a flat tax. It takes a one size fits all approach and everyone has to pay the same percentage to Social Security and Medicare. However, the Social Security tax only is applicable only to earnings up to $132,900 (as of the 2019 tax year). The threshold will increase to $137,700 in the next year. The Social Security tax is calculated at 12.4% of the net income up to the threshold value, while it is 2.9% of total net income for Medicare. The full values are to be paid by freelancers.

Now that you understand that freelance taxes are different from those for the employed professionals, you need to be careful while computing them. Filing the returns and paying your taxes on time is equally important to keep things on track. Having an expert tax professional to guide you and handle your tax returns is a good idea too.

Raising Money When You Want to Start a Small Business

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StrategyDriven Managing Your Finances Article | Raising Money When You Want to Start a Small Business | EntrepreneurshipStarting a business is a common dream, and while you may only need a small investment to get off the ground, it can lead to big things. However, getting that initial seed money can be difficult, especially when you’ve still got rent and bills to pay while you wait for your first profit to arrive. That’s why you need a plan to get your business going, so here are some ideas.

Find Cryptocurrency Investors

While there are a number of platforms where people can invest cash in startups, you’ll find that people are very cautious about giving cash to inexperienced business owners. However, in the world of cryptocurrency, people tend to be more open to taking risks. Putting together an Initial Coin Offering, or ICO, can be a good way to get the money you need to kick things off, and the more unique and exciting the service, the more likely you’ll get funding.

Invest and Raise More Cash

If you’ve saved a little money but need to raise more, you may want to consider investing in and trying to get a return on your cash. For example, you could use Genesis Mining to mine Bitcoins, which you can then sell on an exchange, potentially making a profit. As with any investment, you should do your homework first and ensure you aren’t taking any unnecessary risks.

Sell Things You No Longer Use

A lot of people have things hanging around their house that they no longer need, so why not sell your old items for cash? You may be surprised that you can make hundreds of dollars in just a few days when you list your items online, and as long as you use clear photos and write a decent description, you should get a buyer.

Get A Loan

Understandably, a lot of people are worried about accumulating debt before they even have their first customer, but if you’re starting a business that needs a lot of specialist equipment or supplies, then it is often necessary. Put together a business plan, outlining what you need to borrow and when you expect to turn a profit. This will help impress banks and potential lenders, so they can see that you’re serious.

Scrimp and Save

A lot of small business owners start their ventures by using their own savings. While it’s a big risk to use the money you’ve so carefully saved, at least you don’t owe anything to a bank if things go wrong. Look at what you earn versus what you spend and see where you can boost your income or cut your expenses. You could also start your business as a side hustle with very low expenses. If you do something creative, look out for ways to do it more cheaply, such as finding bulk supplies or buying different equipment. While you won’t be able to quit your day job right away, you can at least start to build a customer base, which in time could take you to the next level.

 

How Is an LLC Taxed?

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StrategyDriven Managing Your Finances Article |LLC|How Is an LLC Taxed?Easily one of the most daunting parts of being an entrepreneur, tax season can be complicated if you’ve never been exposed to doing business taxes before.

In this article, we’ll explore how LLC taxation works, so as an LLC owner, you neither overpay nor underpay the government.

Before We Discuss LLC Taxation

Before we get into the nitty-gritty details of LLC taxation, it’s important to first understand what an LLC is.
A Limited Liability Company is one of the simplest ways for a new employee to structure their business and have it recognized as a commercial entity in the government’s eyes. The requirements to form an LLC are low, making it the path of least resistance for budding entrepreneurship to achieve legal status.

Forming LLC (through an attorney or online service) enables owners to protect themselves with limitations of the risk their personal assets face, should something untoward happen with the company. In addition, starting fees are relatively small (less than $200 in most states).

The principal benefit of LLCs, however, lies in the discussion of LLC taxes. LLC’s are single taxation entities, meaning that unlike corporations, the income can only be taxed at one level (business or personal income).

How is an LLC Taxed?

The answer to this question technically depends on how the company is structured. If the company is structured as a collection of multiple partners, then the LLC’s income is taxed only at the personal income level.

That means that each of the shareholders in the LLC report income from the LLC as their personal income, and they file individual tax returns. No additional forms have to be completed for the LLC itself.

However, if the LLC is structured as a C corp or S corp, which it can elect to do after it’s created, then it will be required to submit additional documentation. The IRS Form 8832 is used for the LLC to elect to submit taxes as either a C corp or an S corp. The documentation submitted thereafter will determine what additional forms the LLC uses to be taxed (Form 2553 for an S corp and Form 1120 for a C corp).

Without corporation status, the LLC’s income is classified as “pass-through” which means that it just goes into each owner’s personal income return.

Do LLC’s Pay State Income Tax?

Some states require that LLC’s pay income tax at the state level. This is fairly common, and will often take the form of a franchise fee.

The franchise fee is an annual fee submitted whenever the LLC submits its annual report. The annual report contains information regarding total revenues, total operational expenditures, philanthropic expenditures, etc..

Most states will use the federal tax liability as a starting point for their own tax determination. Look up your individual state’s LLC tax law to figure out how much you’ll be liable for this April.

Don’t Mess Up Your Taxes!

Few things can kill a growing company’s momentum than falling on the wrong side of the IRS. Take the right steps to ensure that you’re completing your LLC taxation correctly — look up state laws, fill out the right forms, and consider calling a professional if you need help.

Once you’ve gotten through this tax season, make sure to come back and subscribe for more small business advice!

What Harms Your Business Budget The Most?

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Every single business out there has a budget. Every single business who wants to survive beyond the first five years is going to listen to and obey their budget! It might be hard going at times, but it’ll be worth any potential risks in the long run.

And because of that, you might want to work out what costs are currently the biggest sucks on your budget. You need to be sure you can provide for them, month in and month out, and always be sure to prioritise them until you feel secure enough to move on. It might just be an example of growth, at the end of the day!

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Advertising Costs

Advertising is a big part of the business process. If you have a company, and that company sells a product, everything from brand name to your finished logo is going to come off as an advertising expense. It’s been found that businesses can spend at least 20% of their total budget on marketing, and that’s a huge chunk of money for one department alone.

As a small business, you’re going to be placing emphasis on advertising, to ensure you get the word out – have you budgeted enough money?

Travel Costs

Ferrying yourself to and from work every day is going to get expensive. Of course, you should be able to claim at least most of these expenses back at the end of the fiscal year, but that doesn’t change how expensive they can be in the meantime. You’ll still have to fork out for the fuel, and the car costs, and the mileage covered under your insurance, and that’s hard on a small business or startup fund.

At the same time, if your business makes use of a company fleet for general employee use, these costs are going to be maximised tenfold. How do you cut back on these kinds of expenses, when every working day is filled with employees going from A to B and back again? You’ve got investors to meet and clients to satisfy, after all.

Well, mandating a policy of writing down time spent with a vehicle, and making sure it’s returned at a certain time at the end of the day can help you to gather control. And with something like a Fleet Fuel Card, you should be able to save on standard fuel costs, no matter how much you need to use each year.

Rent Costs

And finally, you’re going to have to fork out for rent costs month by month too. Even if you’re running a home business, and have a mortgage to pay, you’re still going to end up counting these living expenses as a business cost.

And seeing as lease agreements are usually dependent on the kind of business you’re running, you’re going to be using some very niche and specific calculations to try and factor rent into the budget.

Your business budget can be quite stretched, so make sure you’re aware of sinkholes.

How do tax changes affect you?

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StrategyDriven Managing Your Finances Article |Tax Reform|How do tax changes affect you?Politicians of any experience and caliber love to talk about tax reform. Why should you care? As you already know, tax reform is a change in the current tax code. That includes the way taxes are collected as well as the amount of taxes you will pay. The keyword here is “you”. You are the taxpayer and therefore any change in the current taxation system will have a direct effect on you. Another reason to stay informed about any changes in the tax law is the change in the way taxes are managed and distributed after they have been collected. Your money will be managed by the local or federal government. The way it is done and the places your tax money will be designated to will have a major effect on you on many different levels. If you want to learn more about how tax changes will affect you, go to juliogonzalez.com or read more below.

What are some of these effects?

If the current tax code is simplified enough, you may be able to get your own tax return done. That translates into a few hundred dollars savings annually directly to you. Being able to understand the taxation rules and regulations will give you the confidence to file on your own. If you currently hire a professional out of fear to make a costly mistake, you will be able to save that fee by doing it yourself.

The major goal of any tax reform is to improve and streamline tax collecting processes. Depending on what exactly is changed, you may see effects like lower taxes that you have to pay. As a business owner, you may experience a change in the way you can make business expense deductions. As a homeowner, you may get more or fewer rebates for energy-efficient improvements done at your house.

Tax reform would also call for language simplification when dealing with the IRS. The plain language throughout will help you understand exactly what you are dealing with.

Tax reform will provide taxpayers with the necessary tools to plan ahead. It is especially valuable for self-employed people. The current code already has some tools on how to estimate the amount you will end up paying at the end of the year. However, more improvements will allow you to estimate your tax goals. You will be able to enter your goals like “pay zero” or “get a return” and see how much you will need to put in to meet a certain goal.

Tax reform will provide you with the tools to foresee and prepare for a tax bill or avoid paying a penalty. As we know, the current IRS administration is often ineffective when helping its main customers. Most people don’t feel like figuring it all out on their own. Tax reform will provide more resources for the current IRS. As more webinars by the IRS on how to use the system become available, you will be able to use those tools and save more time and money.