There are numerous benefits to owning your own business as a sole proprietor, but preparing your taxes each year can be complicated. Indeed, there are quite a few potential pitfalls which employees never need to deal with. If you are new to sole proprietorship, it is easy to stumble into some of these if you do not have a tax preparer there to help you.
Following are 5 ways that a tax accountant can streamline your taxes and help you stay on track toward your financial goals.
1. A tax accountant can help you predict your tax burden for the year.
One of the biggest challenges of self employment for a lot of people is keeping up with tax payments throughout the year when income comes in unevenly.
While some businesses have steady flows of income from month to month, most have some level of variance. And in some situations (say you are a freelancer), that variance could be quite dramatic. You might make significantly more during some quarters than others.
You are expected to make estimated quarterly tax payments to keep up with your tax burden, but if you happen to underpay by mistake, you could be assessed a penalty when you file your annual taxes.
If you are struggling to figure out how much to pay each quarter, a tax professional can help you to do the math. One common method is to simply take the amount you made last year and divide by four. But you also can run more detailed calculations each quarter based on your income as you go.
Whatever approach you decide on with the help of your tax accountant, paying your full estimated taxes on time can save you money at the end of the year.
2. Your tax preparer can help you figure out if you qualify for the home office deduction.
If you happen to work for home, you might qualify for the home office deduction. This can reduce your overall tax liability.
While the home office deduction is very popular, many people are confused about what constitutes a home office in Uncle Sam’s eyes.
To qualify, your home office needs to be an area in your house which is used exclusively for business. It does not technically need to be a separate room, but setting up a partition of some sort can help you to defend your claim to the deduction if you are ever audited.
If you are not sure whether your home office counts as one for tax purposes, your accountant can help you make the appropriate determination.
Your tax accountant may also be able to help you figure out some simple modifications you could make to your home environment and your lifestyle so that you can claim the deduction.
3. With at tax accountant’s help, you can make sure you are not missing out on any tax breaks.
The home office deduction is just one commonly overlooked tax break for the self employed. Another is the deduction for health insurance, which you can take even if you are not itemizing. Likewise, you can claim a deduction for Medicare premiums.
Then there are deductions which a lot of self-employed people take which they probably should not. Likely culprits include deductions in travel and entertainment—which sometimes are legit but often are not. Going overboard in these areas can also be an audit flag.
When you work with a tax accountant, you can navigate around potential pitfalls in both directions. If you are worried about whether you should be taking a deduction, the tax preparer can help you figure out if it is valid—and ensure you are not missing any significant tax breaks.
4. Your tax accountant can help you understand how your taxes impact your health insurance and vice versa.
Health insurance and taxes have always been complicated topics, both in and of themselves and insofar as how they relate to one another.
That can get extra complicated when you are self-employed, particularly if you have dependents on your tax return, who may or may not be on the same healthcare plan that you are.
If you work with a tax accountant, you can make sure that everyone is on the right health plan, that you are taking advantage of all tax credits and deductions, and that you are correctly estimating your income when you apply for coverage (if you are going through ACA). If applicable, an accountant might also be able to help you set up a health savings account.
5. A tax accountant can help you to figure out how to save for retirement.
One more challenge that goes with self employment is trying to figure out the best plan to invest and save for retirement. A tax accountant can advise you as to the impact that different retirement plans might have on your taxes.
If you think you need help with your taxes this year, Alan M Brown, CPA is just a phone call away. Contact (760) 212-4993 to ask your self-employed tax questions today.