Having a home business entitles you to tax deductions that you do not get as an employee. However, to maximize your savings, you need to know the rules and have an organized, functioning system. Here are six tax tips for your home business.
1. Develop a System
You need a system for invoices and expenses when it comes to tax time. There is no excuse for shoeboxes, which leave you dreading the drudgery of sorting through receipts and other random bits of paper. Technology has now made recording the financial aspects of your business easier, but you must still have a filing system for receipts and other paperwork. File similar receipts together, such as office expenses or hotel bills, or scan and organize your receipts digitally.
Either way, tallying your expenses will be much quicker at the end of the year. Another option is to keep a journal where you write down the expense and attach the receipt to the page. However, you choose to manage your receipts, keep up on the process throughout the year instead of waiting until tax time to get your receipts organized.
Financial software or online accounting can track your income and expenses as you go if you prefer, and you can import the data into tax software, which saves substantial time.
2. Know Your Deductions
Home-based business owners often avoid the home-office deduction, fearing a potential audit. Fortunately, home offices have become more mainstream, and the IRS has relaxed the rules. That said, you can only take the deductions for which you qualify.
The home office deduction requires that your home office be used regularly and exclusively for running your business and that it be the principal place of business. If you use the corner of a room, you can only consider the square footage of that corner rather than deducting the space of the entire room. (The home-office deduction is based on either the square footage of the office or a percentage of the total square footage of your home).
Other home business deductions include equipment, such as a new computer, supplies, services (e.g., Internet access), and travel. Basically, if you have to spend money on something to do business, it is probably deductible.
3. Include Your Startup Expenses
If you started your business this year, you might be eligible to deduct the costs of getting it up and running, such as buying a permit or setting up an LLC.
4. Track Your Car Expenses
The IRS allows you to deduct car expenses related to your home business. You have two options: the standard deduction based on the miles you drove, or actual car expenses. To take the mileage deduction, keep a record of the miles you have driven. If you drove to the office store to get paper or ink, write it down. Keep a notebook in your car, or use a smartphone app.
To take the actual expense deduction, track all the expenses the car incurred. If your car is used for both personal and business purposes, track and separate your business versus personal use of the car.
5. Consider Health Insurance and Retirement Expenses
As a home business owner, you are responsible for health insurance and retirement. Fortunately, many health expenses and retirement savings are tax-deductible.
6. Consider Estimated and Self-Employment Taxes
In a traditional job, your employer withholds taxes, social security, and Medicare payments from your paycheck each month. As a home business owner, you are responsible for making these payments. In the case of taxes, you are required to make estimated tax payments four times a year instead of monthly. When you do your taxes, you will also need to pay self-employment tax, half of which is tax-deductible, to pay Social Security and Medicare.
The easiest way to plan for estimated and self-employment taxes is to put some money into a savings account each time you get paid.
Estimated tax payments are due on the 15th of April, June, September, and January. However, if you were impacted by the winter storms in Texas or Oklahoma, you may delay the first estimated payment of 2021. Those affected—both businesses and individuals—may delay all tax returns and payments until June 15, 2021.
At tax time, submit your taxes as usual. If you overpay your estimates, you will receive a refund. If you do not pay enough, you will owe, and, depending on how much you owe, you may have a penalty and fee. You will pay your self-employment tax when you do your tax return in April.
Taxes can be overwhelming and complicated, but you can make calculating and paying them easier by having a system to organize and track your income and expenses.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.