The Little Things Really Add Up When Counting Your Deductions

Often, the most important thing you can do to save money on your taxes is to keep good records. If you’re a small business owner, or you do volunteer work or other qualified

Filing cabinet

If it’s not in here, it’s not deductible.

activities throughout the year, that means tracking a lot of little expenses, because they can add up. Of course, you remember to deduct that new computer, and the money you pay the accountant, and you’re taking your home office deduction. But are you capturing all the small expenses, too?

Expenses We Forget

It’s amazing how much goes into running a small business. Good organization is crucial or things can become tangled between business and personal accounts, especially for sole proprietors. You’re doing your grocery shopping and remember you need a new desk calendar, so you toss one in the cart. Or you’re shopping for an Anniversary gift on Amazon and see a good deal on printer ink, so you stock up. Or maybe you’re meeting a potential client for breakfast. While you remembered to deduct your meal, you’re not used to noting the mileage you put on the car to get there.

These common but small expenses can add up to a major tax deduction. The trick is keeping detailed records and remembering to deduct them at tax time. Some of the most common (and often forgotten) business expenses include:

  • PayPal and other payment processing fees. 3% of every payment you receive via PayPal goes to them. Make sure you’re tracking those fees over the course of the year and deducting them as “bank fees”.
  • Dues and subscriptions. Any recurring charges for media, educational material, or other business-related subscriptions like magazines, paid forums, or professional associations are tax deductible. Don’t forget to note them all down.
  • Office supplies. Everything from paper clips to a brand new computer can be deducted if it is used strictly for business purposes.
  • Domain names and hosting. Your hosting bill, domain name purchases, etc.
  • Advertising. Any charge for online or offline advertising or materials that go toward advertising you do yourself (like posting flyers around town) can be deducted as a business expense.
  • Commissions. If you pay someone a commission for selling your goods or services on your behalf, you can deduct that expense even though they’re not actually your employee.

Keep Good Records

The key to saving money on your taxes lies in keeping good records. For most small businesses, the easiest and best solution is to use a software program like Quickbooks or Peachtree. For some, however, good old fashioned pen and paper works just fine. Whichever solution you choose, though, make sure you consistently record your expenses. Scrambling to get it all together at the end of the year would be a nightmare.

Instead, schedule some time each week to update your books. If you’re not the type to deal well with numbers, consider hiring someone to handle your accounts for you. Remember – what you pay him or her is deductible too!

Finding all those hidden expenses can mean hundreds or even thousands of dollars at the end of the year. While the things listed here will get you started, it’s a good idea to also speak with a tax professional. Once they fully understand the nature of your business, he or she can ask the right questions and make appropriate recommendations for your business deductions.

Photo credit: KAZVorpal

Saving on Taxes Today While Planning for Tomorrow

It’s becoming more difficult every day to rely on other people to take care of your financial health as you get older. Whether it’s corporate shenanigans or the implosion of Social

401k and IRA

Is it going to be there when you need it?

Security, it seems like there’s always a reason to worry.

When you’re working for someone else – if you’re fortunate – you have a company-matched 401K and – if you’re really fortunate – maybe even a fully funded pension plan. When you’re self-employed, though, saving for retirement is completely your responsibility. And unless you want to still be working when you’re 89, it’s a good idea to start saving now.

Fortunately, at least for right now, the government makes it easy and tax free to build up your personal retirement account.

IRA or 401k?

A 401K is a special type of retirement fund set up and administered through your employer. Some companies offer to match a percentage of every dollar you contribute, making this a nice, pre-tax perk to grow your savings. An individual 401k can be set up for self-employed individuals under certain circumstances.

Individual Retirement Accounts (IRAs) are set up with the help of a bank or financial planner, and are also not taxed. So, if you’re paying 30% of your net income to the IRS, you can save 30 cents on every dollar you contribute to an IRA.

There are limits on how much you can invest in a retirement account. For individual 401Ks, the maximum you can save pre-tax is $17,000. For IRAs, it’s $5,000 annually.

Before you start saving, though, remember that this tax savings comes with a catch: You can’t touch the money until you’re 65, without paying the income tax AND added penalties. Plus, you’ll have to pay income tax on that money when you retire. So don’t look at these retirement savings options as a tax shelter. They’re not.

Are retirement savings accounts a sound investment?

Retirement savings accounts definitely have one leg up on stashing your money in the bank: the potential to earn high interest rate returns. Since you have the flexibility to divide your IRA funds up among various investments, you can potentially see returns as high as 12 or 14%. That’s far more than the maximum of 1% your savings account is probably offering right now.

But, being realistic, your retirement funds are being invested in stocks and bonds, so there’s no guarantee that they will earn money. As a matter of fact, anyone who was close to retirement age when the economy took a downturn can tell you how secure they felt. Many people saw their IRAs and 401k’s disappear before their eyes.

But if you’re a small business owner hoping to put some money aside for retirement and save money on taxes at the same time, an IRA or individual 401K is ideal. They’re easy to set up and inexpensive, plus they give you the freedom to invest your money in high-earning stocks or to choose bonds, based on your level of risk aversion.

How-To Get the Most Out of Your Home Office Deductions

home office

The home office deduction could be worth a lot of money.

If you run a small business in your home, it might be challenging to find valid deductions to help save on your taxes. Especially if you work online, where it’s unlikely the cost of physical goods, shipping, or employee wages will help offset your income.

There are a few things you can claim, though, to reduce what you owe the IRS. One of the biggest areas for deductions is your home office.

What a Home Office is, and is Not

Per the IRS definition, a home office is “a portion of your home set aside exclusively for business use.” You have to be able to show that your home office doesn’t serve any other purpose. For instance, even if you do most of your work at the kitchen table, you won’t be able to claim the kitchen – or even part of it – as a home office because the IRS knows other personal business goes on there.

You also must be able to prove that your home office is “the principle place of business.” If you have an outside office, and only occasionally use your home office, you may not qualify for a deduction.

How the Home Office Deduction Works

Your home office deduction will be calculated as a percentage of all your housing expenses. For example, if you’re using a spare bedroom as your home office, you could measure the square footage of that room and compare that to the square footage of the home to figure out what percentage of space you’re using for business.

Using that figure, you can calculate how much to deduct from your taxes for mortgage interest, utilities, depreciation, and home repairs. Plus, if you do any business online, you may be able to deduct the cost of your Internet service.

Other Deductions in Your Home Office

In addition to the percentage of home expenses the home office deduction includes, don’t forget the items that actually make that room an office. Your furniture, office equipment, your computer and everything else you need to operate your business are all deductible. Your accountant or tax professional will be able to help you determine whether it makes sense to count these items as an expense or to depreciate them over a period of years. To make it easier on them, keep track of everything you spend on office equipment.

When you’re running your own business, it can seem like you’re paying a lot of taxes. That’s because some of the tax burden used to fall to your employer, and now you’re responsible for all of it. The home office deduction is one way to help offset those higher taxes, so make sure you’re claiming every square foot you’re entitled to.

Photo credit: Sean MacEntee

Which Business Structure is Right for Entrepreneurs?

A lot of entrepreneurs actually stumble into their own businesses. Maybe your story is much the same: when you started working online, you didn’t think much about your actual

Business structure

Sole proprietor? LLC? Corporation?

business setup. Maybe you just set up a PayPal account, added some “buy now” buttons to your website, and started selling little doodads you made as a hobby. But then, before you knew it, you were thinking about quitting your job, and suddenly, filing taxes popped into your mind.

You’re not alone. Many new entrepreneurs already have a full-blown business long before they think about how to legally structure their business. But that’s a mistake and it can wreak havoc with your tax bill. So let’s take a moment and talk about your options before it gets to that point.

In most states you have three choices when it comes to business entities:

Sole proprietor

If you’ve stumbled into business, you’re probably set up as a sole proprietor right now. When your business is structured this way, you are your business. There is no separation of funds, either for tax purposes or if there is a lawsuit. You file your taxes just as you always have, with the addition of a Schedule C that records your business profits and losses.

Limited Liability Company

While still very similar to a sole proprietorship, the limited liability company (or LLC) offers some protection from debts incurred by the business. You still file your income tax return as if you and your business are the same, however, because to the IRS you are. LLCs are regulated by the state, and are not recognized by the federal government.

When your business is structured as either a sole proprietor or an LLC, you’re responsible for paying all the taxes, including the percentage of Social Security tax your employer used to pay when you worked for someone else.

Corporation

If you incorporate your business, your business becomes completely separated from you as an individual. In fact, legally and for tax purposes, you’re actually an employee.

Corporations don’t file income tax returns, and you won’t receive 1099 forms from your customers. However, you will have to pay yourself a salary, which means sending withholding tax to the IRS for the money you earn.

In some cases, this can save you money because now the corporation is responsible for half your social security tax. But the added burden of dealing with payroll and more government paperwork means it might not be worth it to you, especially if you are running your business by yourself.

The best advice? When your business makes that transition from a hobby to a real business, it’s time to talk to an attorney, tax professional or qualified accountant. They’re the ones in the best position to discuss which business entity makes the most sense for you, your financial situation, and your business goals.

Photo credit: Mike Darnell

How to Save on Taxes by Hiring Your Kids

Kids and money

Why not keep that saved tax money in the family?

If you’re a small business owner with children, you might not realize a huge deduction is sleeping in the next room: your kids. Of course, you deduct them as a dependent on your own returns, but if that’s the only tax savings you’re getting, listen up, because you’re going to love this.

As a business owner, you can legally hire your kids and avoid paying many of the taxes that go along with hiring another employee. Things like witholding income tax is not required when employing the underage children of the business owner (unless you are a corporation.) Sole proprietorships and LLCs don’t need to deal with payroll for them at all, even though technically your child is an employee of the business. You also don’t need to cover them for worker’s compensation.

In addition, your kids don’t have to pay income tax on the money they earn – at least to a point – so they can keep more of that money.

But, there are a few rules you have to follow to make sure you handle this valuable deduction properly.

It Must Be Real Work

You have to be careful that your children are actually working in the business. You can’t assign them household chores and consider it a business task. Unless you’re running a landscaping or lawn service, raking leaves won’t qualify. But, if you assign them to do things you would normally do yourself or that you would hire outside help to handle, you’re in the clear.

Here are some ideas of legitimate tasks your kids could likely handle, depending on their age:

• Editing videos
• Basic site updates
• Internet research
• Basic graphic design
• Addressing and stamping envelopes
• Simple accounting or filing

You’ll need to be able prove the number of hours your kids worked, and that the wage they earned was reasonable. In other words, you can’t pay your kids $60 an hour for a job that would normally pay $12 an hour if you hired someone off the street. Set up a timesheet, or other legitimate means of tracking time like any other employee, and make sure your child fills it out and turns it in every pay period so you can provide it when necessary.

Paying Your Children

Each pay period, you’ll pay them right along with all your other employees or contractors. There’s no payroll tax or other deductions to worry about, so they get paid everything they earned, and you claim the expense.

Your child (like everyone else) can earn up to $5,950 tax free. That’s the standard deduction, and it applies no matter who the employer or employee is. So, why not keep it in the family?

In addition, like always, you can still claim your children as dependents. So your kids earn money tax free, your business claims the expense without worrying about payroll taxes, and you claim the deduction. It’s a perfectly legal and ethical system for working smarter while saving plenty of money on taxes every year.

Photo credit: Good ‘n’ Crazy