Tax Filing Guide for Entrepreneurs: Essential Tips & Strategies

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Ah, the joys of taxes — compiling paperwork, filling out forms, crunching numbers. There’s a reason most people put it off until the last minute.

But if you’re a solo entrepreneur or freelancer, tax season can be even more daunting. Whether you’re filing as an LLC, sole proprietor, or something else, here are some best practices to prepare for filing your taxes.

Read More: Guide to Filing Your Taxes in 2021

1. Set aside 30% for taxes before you do anything else.

When you’re your own boss and are making over $400 a year in profit, you’re responsible for paying your own taxes — as opposed to a W2 employee, where your taxes are automatically taken out. Although 30% may seem like a hefty price to pay, the self-employment tax covers both the employer and employee portion of Social Security and Medicare taxes.  I see too many entrepreneurs or freelancers going into debt or dipping into their savings to pay their taxes because they didn’t set them aside as they made money.

To ensure that I have enough to cover my taxes and make sure my money is working for me, I set aside a portion of my tax money in a secure cash account (like this one from Personal Capital) before “paying myself” an income. If you’re an entrepreneur or have a side hustle, it may be worth it to do the same.

Automating a transfer of a portion of my earnings to a high-yield savings account means I don’t have to worry about quarterly or annual taxes sneaking up on me — why not make some interest off it at the same time? And remember— if you make more than $1,000 annually, you must pay the IRS quarterly. If your estimates are high, you’ll just receive more money back come tax time. You can estimate how much in taxes you’ll owe using Form 1040-ES.

2. Keep track of Forms W-9 and 1099-MISC.

If you work as an independent contractor or freelancer within your sole proprietorship, you need to become familiar with W-9s. A W-9 is a form you would have received from a client if they’re paying you more than $600 in a given year. It does two things:

1. Ensures that the client is not responsible for paying your taxes
2. Ensures that you will pay the appropriate taxes to the IRS.

Come tax time, that client will then fill out form 1099-MISC and deliver it to you by January 31st. On this form will be your yearly earnings. 

3. Switch to an S Corp to save money on taxes.

Choosing to file as an S corp instead of a sole proprietor could save you up to 20% on your taxes. By becoming an S corp, you are giving yourself limited liability protection and your business assets become separate from your personal assets if your business were ever sued. 

 You can save big on taxes in two ways:

• You must pay yourself a “reasonable salary.”

By doing so, you are paying yourself personally, and as a result, income and payroll taxes are deducted from each paycheck. Your salary is also a write-off, lowering your profits and, in turn, lowering your taxes.

• You are no longer taxed as a self-employed person. 

This means you no longer have to pay the hefty 15.3% self-employment tax. Instead, you will only be paying the payroll taxes coming out of your annual salary.

4. Do the heavy-lifting throughout the year.

To save yourself from a last-minute panic (trust me, this was me last year), make sure you’re keeping track of your profit and loss throughout the year. Know where your money came from, how much you paid contractors, and more.

I also use this amazing spreadsheet from my friend and fellow entrepreneur Mallory Rowan to keep track of where all my money is going for my business (and it always gives me a fun little buzz when I get to enter an invoice!). It splits my income into expenses, taxes, owner’s comp, and more – so I know exactly what should be in every account.

5. Invest in an accountant.

Yes, you could do it yourself. And if you feel confident enough to do that, go for it! But back when I was working a day job AND running my business as a side hustle, I invested in an accountant. It was the best decision I made.

I spent about $400 a year to have someone do my taxes correctly, get me deductions I didn’t even know existed, and help me optimize my SEP IRA contributions. (Bonus: Hiring an accountant is a business expense, so this year I get to write it off.) I’d rather pay an expert to know something this important was done right — and, if I get audited, he’s there to guide me through the process and advocate for me.

As a freelancer and/or business owner, here are some deductions you may be eligible for:

• Office supplies (your desk, pens, notebooks, filing cabinets, etc.)
• Any business management software 
• Your computer or another machine you use to do business
• Business trips, meals, and gas
• Any advertising and marketing expenses 

Again, the easiest way to take advantage of these deductions is to hire an accountant.

6. Know how COVID-19 impacts your taxes.

If you received a stimulus check: You don’t have to do anything different with your taxes! Stimulus money is an advance on a refundable tax credit, meaning you don’t have to count it toward your income.

If your small business received a Paycheck Protection Program (PPP) loan: When you receive PPP loan forgiveness, the loan forgiveness is not considered taxable income and the expenses you used the PPP loan for are tax deductible expenses.   

If you received unemployment: You will have to pay income tax on that money.

If you took out money from your retirement accounts: You have three years from the date of the withdrawal to pay that money back to your retirement account to file an amended tax return to get a refund on your tax bill.  Under the CARES Act, if you have been impacted by the Coronavirus, you were allowed to withdraw up to $100,000 without an early withdrawal penalty even if you are under 59.5 years old.  You will also have the option of spreading the tax impact of the withdrawal over a three year period starting in the year of the withdrawal.

Overall, staying organized is the best gift to yourself during this stressful time. If filing your taxes isn’t going as smoothly as you expected, put good habits into place throughout 2021 to prepare for next year.

My favorite way to keep tabs on my overall financial picture is with Personal Capital. Personal Capital is the tool that helped me save my first $100K. I use my online dashboard to organize my spending, monitor my cash flow, and prepare for long-term goals.