Oh boy, tax season is upon us and the stress is real. Taking a long, hard look at the financial year can be overwhelming for independent professionals, especially in the wake of a global pandemic.
Tips to Help Solopreneurs with Tax Season
We’ve rounded up a few simple suggestions that will help solopreneurs fly through Tax Season this year. Here we go:
1. Reach out to a certified accountant.
Unless you’re an independent accountant or financial advisor yourself, our suggestion is simple – don’t try to take on too much! You do you – continue to focus on turning your passion into a thriving business, and reach out for professional support to help with taxes. If you’ve been running your own business for a while, chances are, you already have a dedicated accountant you work with. Don’t let naïveté, miserliness or procrastination creep in here – mistakes on tax returns could cost thousands of dollars in penalties and interest, and are avoidable with expert guidance. Ideally, you should schedule a monthly call with your accountant to go over your expenses and revenues, rather than avoid an information shortfall during tax season.
2. Check if you’ve correctly classified your business.
As an independent contractor, are you a sole proprietor? Have you registered as an LLC, or a single-member LLC? Are you accepting payments into your personal account or business account? Each business registration option attracts a different tax structure – failing to properly classify your business could result in unnecessary over-paying taxes. If you’ve just gone independent, it won’t harm you to double or triple-check the nuances of your business registration documents before filing taxes this year.
3. Separate your personal and business expenses.
Everyone knows that it’s bad form to mix business and personal expenses. As an independent professional, though it’s easy for your personal finances to get tangled up with your business finances – categorizing them correctly can be very time-consuming this time of year, especially if you’ve been ignoring them the past 365 days.
You probably aren’t the biggest fan of spreadsheets, but keeping thorough and accurate records throughout the year will ensure your tax return is correct. If you have separate checking accounts and you are diligent about fund transfers being done from the right accounts, come tax time, all you have to do is review your bank statements for a clear picture. Your accountant will be all smiles too! Consider investing in a basic accounting software or a virtual CFO service.
Pro Tip: If you want to be able to claim expenses as deductions, you absolutely must be able to show that these deductions were for business purposes. So make sure you capture business expenses in your business account to make it easier to claim the deductions.
4. Make sure you’re claiming the Home Office Deduction if you’ve been working from home.
Guess what one upside is to work from home? Tax breaks! You can only qualify for the Home Office Deduction now if you’re self-employed. You will not be eligible if you’re an employee of an organization, even if you’ve been working remotely and had to set up an office in your home.
To be eligible, you must have Schedule C income from self-employment to be eligible to take the home office deduction. To qualify for the home office deduction, you must use part of your home “regularly and exclusively” for business. This deduction can be applied to a space in your home that is dedicated to conducting your business – your home office, garage, part of your bedroom, wherever that may be. It applies whether you rent or own, and can be calculated based on the estimated square footage of your office area.
Did you know that the IRS introduced a simpler option for deducting home office expenses back in 2013? Basically, instead of keeping records of all of your expenses, you can deduct $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1500. As long as your home office qualifies, you can take this tax break without having to keep records of the specific expenses! Less paperwork, thank you!
5. Need extra time? File for a six-month extension!
We know 2020 has been incredibly challenging and taxing (pardon the pun) for you – that’s why you might want to think about filing for a six-month extension on your federal tax return with the IRS. You can safely avoid the late-payment penalty and failure-to-file penalty by availing this option. Please note, you still must pay your taxes on time—the extension is only for filing. For 2020 taxes, you can extend from May 17 to Friday, Oct. 15, 2021. If you are not submitting your taxes by Tax Day, then you should consider filing Form 4868, the Application for an Automatic Extension of Time, with the IRS. We suggest going through your accountant if you need to file for an extension.
If you are a solopreneur and feel like you weren’t ready to prepare your taxes this year, start working on next year’s now, while you’re in the proper financial mindset. Your future self will thank you.