Seven Tax Saving tips for Independent Contractors!
Tax Deduction & Strategy Guide 2019:
What are the best tax strategies for consultants? In this article we will show you some of the most important tax deductions and strategies that contractors and consultants are using in 2019. What can independent contractors deduct?
Tip 1: Convert Your LLC to an S-corporation
Now that you have your business entity, it is time to change how it is taxed. Most independent contractors use an S-corporation. The main benefit is a savings on self employment tax.Self employment tax is an additional tax of 15.3% that all contractors have to pay unless they are an S-corp. This is a very large tax.
For example, lets say your net income for 2018 was $40,000 and your taxable income after itemized deductions was a little less than that ($28,000). Your self employment tax would be around $6K. That is then added to your personal income tax (around $3K) and you end up owing a big number. Look at how self employment tax is much larger than your personal income tax.
Tip 2: Entity Type
If you have setup an LLC or corporation already, then you are in good shape. But if you have not, you need to. And before you say “Yeah, I am just not big enough to need that yet” let me tell you why that excuse will not fly.
So, before you think about any of the tax deductions we lay out below, you need to open an LLC or corporation.
People don’t wait for you to get big to sue you. We have been advising small business for 15 years, and the worst lawsuit we have ever seen usually involve very small businesses.
LLCs don’t cost much. A couple hundred dollars usually.
When you have a business entity, you can set up a separate checking account. This allows you to keep business funds and personal funds separate. Really big deal.People don’t wait for you to get big to sue you. We have been advising small business for 15 years, and the worst lawsuit we have ever seen usually involve very small businesses. LLCs don’t cost much. A couple hundred dollars usually.When you have a business entity, you can set up a separate checking account. This allows you to keep business funds and personal funds separate. Really big deal.
Tip 3: Accountable Plans
Now that you have your LLC and S-corp setup, time to figure out how to maximize your home office, cell phone, and automobile expenses.
One of the trickiest deductions for business owners is getting full benefit for your home office expenses. When you are a sole proprietor, this is easy with form 8829, but not really worth it since you have to pay that massive self employment tax if you are a sole proprietor.
This is why we have the accountable plan. This is like making a monthly expense report from you (the owner) to your business. The business then reimburses you. Setting up and accountable plan is easy and you can reach out us on how to do that.
Important parts of your accountable plan:
Make sure you measure the dimensions of your home office space and use an accurate square footage in calculating the deduction.
Only deduct a portion of your phone bill. The IRS knows you use your phone for personal reasons too. Just be reasonable and you will be fine.
The accountable plan establishes that for your automobile expenses, your home office is always your point of origin, so when you leave, you are using the car for business. Without a plan, that is not always the case.
You can still choose between actual auto expenses and the standard mileage rate
Include part of your mortgage interest in the home office deduction of the plan.
Tip 4: SEP IRA
SEP IRA’s rock. They just do!!
They allow you to put money into investments, not pay tax on them when you contribute, and let the money grow tax free until you pull funds at retirement.
SEP IRA’s are very flexible. So you can wait until your tax return is ready, see if you are going to owe tax, and then make a contribution that reduces your tax for the prior year. It is not very common to have tax deductions you can implement after the year ends.
SEP IRA’s are easy to set up, usually don’t cost anything (unlike a 401k which can cost you up to $100/month for even small plans) and can be managed yourself with no compliance testing.
Tip 5: Health Insurance Deductions