Many first-time, self-employed individuals aren’t familiar with running a business, which can lead to financial mistakes that range from frustrating to serious. To avoid a phone call from the IRS, take a look at these five tips for managing your money effectively.
Administer Tax Payments Properly
When you’re self employed, it’s best to make tax payments throughout the year. Quarterly taxes are collected every three months using Form 1040-ES, which you can get by calling the IRS or visiting their website. The 1040-ES comes with an estimated tax worksheet and four payment coupons that you will need to mail along with your quarterly payments. Making your payments on time and in full will prevent many future headaches.
Hire Tax Help
Trying to do everything yourself can be a big mistake when managing your taxes. While it’s fine to do the day-to-day bookkeeping on your own (if you have the time), consulting a tax advisor at least once a year is beneficial. Doing so will keep you from making mistakes that could cost you money or result in an audit. The extra money you pay for tax advice is worth the peace of mind and income saved.
Track Your Expenses
When it’s time to claim deductions on your taxes, you will need proper documentation for all of your transactions. This can be difficult if you’re spending cash all the time, so you may want to consider aquiring a debit card to keep a paper trail for your expenses. If you have to use cash, keep track of your purchases with a ledger or smartphone app. Also, ask for receipts, label them and store them in a safe place.
Pay Family For Help
If a spouse, child or other family member helps you with your freelance business – either directly (designing websites, for example) or indirectly (running to the bank, paying bills) –consider paying them for helping out. Shifting your money to family members will lower your taxable income while keeping your earnings in the household. It also lets them know how much you appreciate what they do for you.
Start a Retirement Plan
Putting money toward a retirement plan is an easy way to save money on taxes. The money you put away in a traditional 401k remains untaxed until you make a withdrawal. This reduces your taxable income, which saves you money. For Roth 401k plans, you are taxed every time you make a contribution, but you won’t have to pay taxes on withdrawals. Either way, funding a retirement plan is a smart idea that helps to secure your future.