Self-employed people can deduct various expenses from their income before figuring out how much tax they have to pay. Unfortunately, most of the self-employed are unaware of all the expenses that they can deduct, so most of them end up paying more taxes than they should.
By taking the time to learn what tax-deductible expenses apply to you, you’ll be able to claim the maximum allowed by law, but without increasing your chances of being audited. The following are common mistakes that many self-employed people make that can end up being costly in more ways than one:
1. Not keeping good records of your spending
When you buy anything related to your job, you should make sure you get the necessary documentation to prove that you made the purchase. This usually involves saving the receipt. Keep all your receipts in one folder, divided into months to make things easier to find.
Along with this folder, you should keep a ledger that details what you bought and why. Also write why you think it is a legitimate business expense; Although it may seem obvious at the time, you can bet it won’t be as easy to remember several months down the road when you’re completing your taxes.
2. Not using your retirement plan
Saving for your retirement has two great advantages. First of all, and quite obviously, it means that you are building a nest egg for the future, so that you have something to live off of when you finish your degree. Second, you can get some great tax breaks for putting your money into a retirement fund.
Self-employed people are allowed to save a large chunk of their income in their retirement fund, and this can make a big difference to your tax bill at the end of each year.
3. Trying to do everything yourself
By their very nature, freelancers tend to like to do everything themselves. However, in the case of keeping your accounts, this can be a bad decision. There are a lot of laws and regulations to understand, and that can take a lot of time, time that would probably be better spent on your business.
A professional accountant will already be familiar with all of these laws and all of the little intricacies involved in applying them. They’ll also be much more familiar with claiming deductible expenses, which means they should be able to save you money in the long run, even after your fees (which themselves are tax deductible!) have been factored in!
By carefully tracking your spending, diverting your money in the most tax-efficient way, and getting professional help, you can significantly reduce your tax bill. At the same time, you’ll have the added peace of mind that you’re saving for your future and that your tax return is as accurate as possible.
