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.
1. Mixing Personal and Business Finances
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.
Do This Instead:
- Open separate bank accounts: It’s smart to have a dedicated business bank account. Rest assured, this doesn’t need to be hard. Lettuce will automatically open your business bank account and set you up with a debit card you can use for all of your business expenses.
- Keep your accounts clean: Just having separate accounts doesn’t necessarily mean clean financial records. It’s your responsibility to use them accordingly. Commit to handling all of your business transactions through your business bank account. Everything else? Use your personal account.
2. Avoiding Tax Planning
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.
Do This Instead:
- Choose the right business entity: Having the right business entity not only gives you extra protection, but it can also save you thousands on your taxes. For example, an S Corp is a tax status that allows you to only pay self-employment tax on your reasonable salary (rather than your entire taxable income). See how much you could save by electing S Corp status, and then let Lettuce do your entire S Corp election for you.
- Investigate tax credits: We’ll talk about tax deductions in a minute, but tax credits are also worth looking into. If you can find some that your business-of-one qualifies for, you’ll get a dollar-for-dollar reduction on how much business tax you owe.
3. Neglecting Quarterly Taxes
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.
Do This Instead:
- Calculate your estimated taxes: Figuring out how much to pay each quarter is one of the trickiest parts. Fortunately, there are plenty of resources available. IRS Form 1040-ES, the IRS withholding estimator, or Lettuce’s tax withholding calculator can all help you determine how much you owe.
- Pay on time: Quarterly tax payments are due on the 15th of April, June, September, and January each year. If one of those dates falls on a weekend or holiday, payments are due the next business day. Missing these tax deadlines can lead to penalties, so make sure you mark them in your calendar. Or, let Lettuce automatically set money aside and make your payments for you.
4. Not Tracking Expenses
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.
Do This Instead:
- Open a business bank account: This point is so important, we’re mentioning it twice. Opening a separate bank account for your business makes it way easier to track your income and expenses, as everything related to your business happens in one place.
- Embrace automation: Keeping track of your finances doesn’t need to be a part-time job on your already-full plate. An AI-powered tax and accounting platform like Lettuce will automatically open a business bank account, track and categorize your transactions, and store all of your receipts. You’ll always have clear, up-to-date financial records without lifting a finger.
5. Overlooking Tax Deductions
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.
Do This Instead:
- Research common deductions: There are tons of business expenses you can deduct from your taxes. Wondering if an expense qualifies as a write-off or not? Ask yourself this: Does this help my business generate revenue? If the answer is “yes,” it’s a justifiable deduction.
- Consult a tax professional: If you’re confused about whether or not you can deduct an expense, connect with an accountant or ask LettuceHead AI to get expert answers to your questions.
6. Missing Tax Deadlines
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.
Do This Instead:
- Mark your calendar: From filing or extension deadlines to your quarterly payment dates, mark all of the must-know tax deadlines in your calendar at the start of each year so you don’t miss them.
- Set reminders: Even with your calendar, it’s easy to lose things in the shuffle. Set reminders on your phone or computer to make sure you never miss a deadline. Or, rely on a platform like Lettuce for helpful nudges or automatic payments.
7. Not Planning for Retirement
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.
Do This Instead:
- Explore relevant retirement plans: From SEP IRAs to Solo 401(k)s, there are several retirement planning options specifically for the self-employed. Take a look at those so you can start stashing away money (and get some tax advantages while you’re at it).
- Contribute regularly: Making consistent contributions (ideally, every year) to your retirement plan can maximize both your savings and your tax benefits. If you’re feeling uncertain, an accountant can give you advice about how much to contribute.
Make Smart Money Moves (Not Mistakes)
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.