How to Maximize Your Tax Savings When You’re Self-Employed
Listen, nobody wants to pay more taxes. The more money you can keep, the better—especially when you’re self-employed.
4 min read
When you’re self-employed, so much advice focuses on paying your taxes—but fewer people talk about saving on your taxes. Yet that feels equally important. After all, you don’t want to overpay if you don’t have to.
The good news is there are several steps that small business owners can take to be smart about their tax payments and keep more money in their pockets.
Curious? Here’s what you need to know to pay what you owe—and not a penny more.
What Are Your Tax Obligations as a Small Business Owner?
Before we get into the tax-saving strategies, it’s helpful to have a basic understanding of the tax obligations that apply to small business owners.
When you’re employed in a traditional full-time job, taxes are automatically taken out of your paychecks. But taxes for 1099 contractors are a little different. Your taxes aren’t taken out automatically, so solopreneurs like you need to pay taxes on their own.
You’ll do that four times per year with your quarterly estimated income tax payments. You’ll estimate your taxable income for the quarter and pay the IRS and your state a percentage of that income.
When tax time rolls around, you’ll do your individual income tax return just like everybody else—or an S Corp income tax return, if you run your business that way. That’s when you find out if you overpaid with your quarterly payments (which means you’ll get a refund) or if you underpaid and need to hand over even more money.
4 Strategies to Take Home More of Your Money
When you’re self-employed, there’s no way to escape paying taxes. It’s part of the gig. However, there are a few different levers you can pull to reduce your tax burden and keep more of your hard-earned money.
1. Select the Right Business Structure
If you’ve never set up a formal business entity, then you’re likely running your business as a sole proprietor. For solopreneurs who want to formalize their business a bit more, a Limited Liability Company (LLC) feels like the easiest option to get some protection.
However, it’s not always the best fit from a tax-savings perspective. Electing to run your business as an S Corp can help you save significantly more on your taxes. With an S Corp, you split your business income into two categories:
- Your reasonable salary: You get to set a salary for yourself (e.g. $70,000 per year). This needs to be reasonable (meaning, similar to what you’d get paid to do that job as a traditional employee of a company). You’ll only pay self-employment taxes on this portion.
- Your business profits: You can still access and use this money in the form of owner’s distributions. However, this amount is not subject to self-employment taxes. This is where the tax savings come in.
Let’s say you had $175,000 in total revenue for the year, with $13,000 in business expenses. When you’re an LLC or sole proprietor, you pay self-employment tax on a taxable income of $162,000 (your revenue minus your expenses). That means you’d pay $24,768 in taxes.
Now let’s compare that to earning $175,000 in total revenue as an S Corp. You take a $70,000 salary and only pay self-employment tax on that amount. The rest ($105,000) can be taken in owner’s distributions but isn’t subject to self-employment tax. You’d pay $10,710 in taxes, saving you more than $14,000 in taxes for the year.
Setting up your business as an S Corp doesn’t have to mean a hassle for you. Use Lettuce’s tax calculator to figure out how much you could save by switching and then let Lettuce do all of the hard work (yes, even the paperwork) for you.
2. Maximize Your Tax Deductions
Ultimately, if you want to pay less in taxes, you need a lower taxable income. Every strategy in this guide is focused on lowering your taxable income—just in different ways.
When you’re self-employed, your business expenses play a key role here. You can write off any of your legitimate business expenses (like office supplies, as just one example) on your taxes.
You might also hear these referred to as tax deductions because you deduct your expenses from your revenue to calculate your taxable income. For example, your business might’ve generated $150,000 in revenue for the year, but you had $13,000 in expenses. So, your taxable income (what you pay taxes on) is $137,000 instead of the full $150,000.
The math is simple: Higher expenses mean a lower taxable income which means lower personal income taxes.
Wondering what you can write off? Any expense that helps your business generate revenue is a legitimate deduction. Generally speaking, these expenses fall into one of the following categories:
- Business meals
- Client gifts
- Marketing and advertising
- Membership dues
- Mileage
- Office supplies and equipment
- Professional services
- Retirement contributions
- Training and professional development
- Travel expenses
That’s not an exhaustive list, but should give you a sense of the different kinds of expenses you can deduct to reduce your taxable income (and, as a result, your tax obligations).
If you’re worried about tracking and categorizing all of your business expenses yourself, let Lettuce do it for you. The automated platform will set you up with a business bank account and automatically log all of your transactions.
3. Save for Your Retirement
Contributing to a retirement account is a good way to plan for your future—and it can also help you save money on your taxes right now.
Again, it’s all about lowering your taxable income. When you contribute to a qualified retirement plan (like a SEP IRA or a Solo 401(k)), your contributions are typically tax-deductible. So, if you contribute $15,000 for the year, you can deduct that total amount from your taxable income.
Be aware that different self-employed retirement plans have different contribution limits. Before making a contribution, take a look at the IRS’ limits for that tax year to make sure you don’t exceed them.
4. Keep Careful Track of Your Finances
Here’s another way that too many solopreneurs leave money on the table at tax time: poor recordkeeping. Without accurate financial records, it’s easy to make a mistake—like forgetting to log a legitimate expense or paying a penalty for missing a tax deadline.
Too many blunders like that mean you’ll end up overpaying on your taxes or spending money unnecessarily. Find accounting software or a system that helps you organize your business finances throughout the year. That way, when you get to tax time, you have all of the data and documentation you need to make smart decisions and maximize your savings.
Lettuce can be a huge help here. From automatically tracking and categorizing your business expenses to making your quarterly estimated tax payments for you, Lettuce’s automated tax and accounting system can keep all of your finances on track—without any elbow grease from you.
Pay (and Stress) Less at Tax Time
You need to pay your taxes—but you don’t need to overpay them. But, surprisingly, that’s an easy trap to fall into when you’re self-employed.
Put the above strategies to work so you can reduce your tax burden and keep more of your hard-earned money where you want it: with you.
Ready to automate your taxes and maximize your savings? Get started with Lettuce today.