Understanding Self-Employment Tax (and How You Can Pay Less)
Ask a group of solopreneurs what the most daunting aspect of self-employment is, and somebody is sure to utter this word: taxes.
There’s no such thing as a perfect solopreneur—everybody makes mistakes. But while it’s normal to mix things up now and then, financial planning is one area where you want to be particularly careful. Too many missteps and you risk missing tax deductions, keeping inaccurate records, and even paying hefty fines.
You started your business-of-one because you’re passionate about your work—not because you’re an expert bookkeeper. For that reason, there are quite a few financial blunders that are common among freelancers, small business owners, and solopreneurs like you.
Let’s take a look at seven of the most common slip-ups, as well as some smart financial strategies you can use to avoid them.
While combining your business and personal finances might seem like the easier route, it actually makes managing your money way more complicated. Your financial records quickly become a tangled mess. That makes it tough to get a handle on your cash flow and the financial health of your business, and it adds even more hassles and headaches at tax time.
For most solo business owners, business tax is a necessary evil. They know taxes are important, so they grit their teeth and get through them—without ever spending much time or energy being strategic about their taxes. That means leaving a lot of money on the table.
As a traditional employee, your individual income tax and other taxes (like Social Security and Medicare) are automatically withheld from your paycheck. That’s not the case as a solo business owner—you’re responsible for making these tax payments yourself. You’ll do this four times per year through your quarterly estimated tax payments. Missing these can lead to underpayment penalties and an overwhelming tax payment at year-end.
It’s important to track every dollar that goes in and out of your business. Yet, too many solo business owners let this responsibility slide—and they quickly find themselves with inaccurate financial records and a big mess of receipts, payments, and other transactions they need to sort through to get their books back into shape. It’s easy to lose legitimate tax deductions in the shuffle this way, which means paying more in taxes than they’d otherwise need to.
From office supplies to software subscriptions, you can write off all of your legitimate business expenses. Put simply, you subtract their cost from your income. This reduces your taxable income, which means paying less tax. But this is much harder to do if you’re not in the loop on eligible business deductions or you don’t keep careful track of your expenses.
You keep a lot of balls in the air as a solo business owner, but tax deadlines aren’t something you want to let slip through the cracks. Failing to stay on top of your tax calendar can mean late fees, penalties, and every freelancer’s worst nightmare: landing in hot water with the IRS.
Saving for retirement not only helps you plan for your financial future, but it can also offer valuable tax benefits for your solo business. Yet, without the motivation of employer-sponsored retirement plans, many solopreneurs overlook retirement savings entirely.
Mistakes happen in business ownership, but your finances don’t have to be a guessing game. With the right strategies, support, and tools, you can steer clear of these common pitfalls and make smarter money moves for your solo business.
Ready to take control of your finances without all of the stress? Get started with Lettuce today.
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