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7 Ways to Reduce Your Tax Bill

7 Ways to Reduce Your Tax BillAs a business owner, including startup founders and freelancers, you dread the word "taxes" because you know it involves parting with some of that hard-earned income that could be spent on other things or saved. It's a challenge that every business owner faces, regardless of legal structure. Even with continually shifting tax policies on the state and federal levels, there are ways to reduce your tax bill. 

While I am not a tax professional, I am a small business owner just like all of you and like my own customers, so I've learned new strategies that have helped me keep more of what I make. Here are seven options to consider for your business:

1. Maximize Expenses for Receipt Tracking

You'll need every legitimate deduction that you can find. A whole year's worth of expenses counts toward that tax bill. Therefore, it's important to track everything that you might have purchased. While you might have an accountant who can remind you what you should deduct at the end of the year, finding the proof that you had those expenses can be a nightmare. That's because you may not consolidate and organize your receipts. Instead, you've probably shoved the receipts in drawers or misplaced them. 

Instead, you can use apps that integrate with financial software you may use, which help to track, consolidate, and categorize all your receipts in a digital format. That way, you don't lose them and you immediately have them organized for the end of the year. Some examples for your mobile device include BizXpenseTracker, Expensify, Mileage Log+, Shoeboxed and Smart Receipts.

2. Know Your Deductions

If you are a freelancer, you may not realize how many deductions you can actually take. For example, you can deduct the business use of some of your personal assets. That means accounting for how many miles you drive your car for business-related activities, such as business meetings, events, and other activities that involve your company. 

As a freelancer, you most likely work from home. That means you can take a home office deduction. Any meals, entertainment, and travel associated with your company can also be deducted at various percentages. Other deductions to include are unpaid invoices, marketing, and office expenses and equipment. Here's a list of deductions that apply to most self-employed professionals and freelancers 

If you run a business that is incorporated, your tax deductions will be different than those who are self-employed. Check with a tax professional or accountant that you most likely use already to navigate the complex world of operating a corporation.

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3. Start a Retirement Plan

This is one of the best ways to defer income from your tax basis. If you start an Individual 401(k), the IRS allows you to put away a considerable amount of money towards retirement that reduces your taxable income reporting for that year. Turn 50 and the IRS also allows you to put more away as a "catch-up" amount. Other options include a SIMPLE IRA and a SEP IRA. While other retirement plans may allow you to open and contribute to them up until the April deadline for taxes, you must open an Independent 401(k) by December 31st to qualify for the current tax year. 

An additional benefit is that money you put into the retirement account will grow tax-free until you retire.

4. Open a Health Savings Account

Adding this strategy to your tax reduction plan serves another purpose beyond just reducing your taxable income. Since medical costs continue to rise despite attempts to decrease this expense, it's a good idea to put money aside for any future or unexpected health care needs that arise. If you have a high-deductible health plan, you can establish a Health Savings Account (HSA). 

Here are the primary benefits: you'll have a pre-tax contribution that grows tax-free and offer the ability to withdraw from the account on a tax-free basis when the medical expenses qualify.

5. Leverage the Lifetime Learning Credit

If you are looking for a way to expand your education and skill set while also reducing your taxes, this credit is for you. It applies to training programs, college, and other post-high school education. Each year, you can take up to a $2,000 credit. It's a real incentive to work on expanding your professional development so that you can offer more skills and knowledge to your clients and customers.

6. Pay 100% of Your Social Security Taxes Owed

As a self-employed individual, you can opt to pay 100% of your Social Security taxes owed. In return for doing so, you can deduct 50% of the taxes paid. It's not necessary to itemize to claim this tax deduction. You just may not be aware of this opportunity to further reduce your tax burden.

7. Change Your Business Structure

If you are a freelancer, the tax changes proposed by President Trump currently being hashed out by the Senate could impact your status and lead you to consider a different business structure. Many of the changes could take away some of the treasured deductions that freelancers have enjoyed and that have helped them lower their taxable income. This could be primarily because of the doubling of the standardized deduction that individuals and married couples can take would make it far greater than the itemized deduction amount. 

By changing your business structure and paying yourself a fair wage through the new structure, you may benefit from the proposed lowering of the business pass-through rate and essentially lower your tax responsibilities. While you would still have to pay Social Security and Medicare taxes as a Limited Liability Company (LLC), you could reduce the other tax amounts that you would have if you remained as a freelancer operating a sole proprietorship. 

However, none of these tax changes are set, so it's important to continue watching the changes and conferring with a tax professional on the best approach that fits your individual situation. Be prepared to look ahead and consider your earnings potential in the coming year to determine which tax reductions strategies address any changes in income. Also, don't wait until the last minute before working on your taxes! You may miss out on some important benefits.


BluePay is pleased to bring you this valuable information from, Due, makers of a free digital wallet that allows users to easily make and accept payments online.

Topics: Partner Posts, Small Business Tips

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