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.


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