3 Profit Hacks From Top Tax Experts
Small-business tax experts share their best hacks to grow your bottom line.
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As a self-employed entrepreneur, you don't get the luxury of company benefits such as healthcare, matching IRA contributions, and discounted services. Instead, you need to take care of these benefits yourself, which can be a hefty financial burden. Since most of these expenses are essential in the modern world, you will need to figure out how to pay for these benefits without doing too much damage to your income.
The key is to place the money in smart vehicles that make money for you. There's nothing smart about dumping these funds into a regular savings account. By moving your money into smart accounts you lower your taxable income, thereby minimizing your tax burden. If you're a freelance entrepreneur looking for ways to maximize your income, then consider these three profit hacks.
Take advantage of the most tax-friendly account in America.
If you're paying a lot of money out-of-pocket for health-care services during the year (or anticipate doing so in the future), it makes a ton of sense to open a Health Savings Account, or HSA. This type of account allows you to set aside money, pre-tax, that you can use at any time for qualified health-care costs.
You can open an HSA in 2017 if you have a so-called "High Deductible Health Plan" (HDHP), which means your deductible is at least $1,300 for single coverage or $2,600 for family coverage. Additionally, your annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) cannot exceed $6,450 for self-only coverage or $12,900 for family coverage.
We spoke with Barbara Weltman, small-business tax expert and author of multiple books including J.K. Lasser's Small Business Taxes (more than 250,000 copies sold) about what finance hacks freelancers and small business owners can use to increase their bottom line. Her number one strategy? Health Savings Accounts.
"I'm a big proponent of HSAs. They're a triple tax break–there's nothing like it in the tax code," Weltman says. "HSA contributions are tax-deductible, tax-deferred, and tax-free." What this means for entrepreneurs is you can put money into an HSA–up to $3,400/$6,750 per year depending on if you're single/married–and deduct the contribution on your tax return. Interest earned is also tax-free, as well as any withdrawals you make to pay for qualified healthcare costs.
Another great benefit? "Portability", Weltman says. "Your HSA belongs to you, not your employer." This is especially advantageous if you started an HSA with your employer but leave to take another job or go self-employed full-time. In today's economy, the freedom to keep your benefits is a huge plus.
Weltman also notes that the health-care trends in both Washington and with private insurers strongly favor HSAs. As insurers offer more high deductible plans to combat rising healthcare costs, Health Savings Accounts are becoming an increasingly attractive option to safeguard your money while slashing tax bills.
Avoid irking the IRS.
Having the IRS hit you with unexpected penalties or fees for underpaying taxes or paying late is probably the least-desirable thing you want as an entrepreneur. These are obvious costs that can gouge your profit (IRS penalties are not tax-deductible!), but there are hidden costs as well–being the subject of an audit or having to amend your tax return takes a huge amount of time, which means less time running your business and generating revenue.
We spoke to small-business expert Barry Moltz, who also counts Microsoft, American Express, Capital One, and GE as clients. He had has these tips: "Pay estimated personal taxes quarterly, so there isn't a big surprise at the end of the year. Have separate credit cards for the company and for personal use, so it is easy to track all applicable businesses expenses for a maximum tax deduction."
As a small-business owner or freelancer, it's important to make sure you're on top of your tax payments, since no taxes are automatically withheld from your earnings like a regular job. The IRS requires self-employed taxpayers to make quarterly payments if they meet the minimum threshold, so file on-time if this rule applies to you to avoid late fees and penalties. Regardless, it's a smart way to budget your tax expense throughout the year rather than paying out a big chunk all at once.
Second, Moltz's recommendation to open a dedicated account for your business earnings and expenses is a simple but shockingly underused one. This is perhaps the easiest way to identify profit-increasing business expenses you're already incurring that are tax-deductible.
Plus, an exclusively business account will save you countless hours of headache should the IRS or your accountant request additional support for a write-off. If you don't already have separate accounts as an entrepreneur, take 15 minutes right now and open one.
Don't pay double.
Gail Gardner, a small-business expert and founder of GrowMap.com, clued us in on a little-known issue that caused some freelancers and business owners to end up paying double on their tax return.
As more and more small business owners rely on payment platforms like Square, Stripe, Paypal, and Shopify to get paid for goods and services, it has caused some confusion as to who's responsible for providing the required tax documents at the end of the year.
These documents are referred to by the IRS as 1099s. They list the official total payment made to contractors during the year. Traditionally it's the responsibility of the party paying for the services to fill out and send accurate 1099s–your client. However, because payment platforms like Square and Paypal technically are the entities paying you, it's actually their responsibility to furnish these forms.
What's the issue, then, you ask? At the end of the year you might receive two 1099s for the same set of services performed–one from your client and the other from the payment platform. Freelancers and small businesses who don't have degrees in accounting and taxation may list both on their tax return–a mistake less rare than you may think, says Gardner.
"The income will be over-reported," Gardner states, which is a big problem for your bottom line because it means the IRS wants double the tax payment.
Don't make the rookie mistake of listing all your 1099 amounts as income if you fit this profile. Be sure to only report the income you've earned–and if you primarily get paid through platforms such as Square and Stripe, the tax documentation should come from them, not your clients. Being savvy about this will help avoid paying double in taxes.