Taxes are the single largest expense a self-employed person pays year to year. In your lifetime, you will almost certainly give more of your money to the government than you will spend on any other single endeavor. In 2019 alone, the government collected $3,460,000,000,000 (3.46 trillion) in taxes. That’s a lot of zeroes!
That number is estimated to be more than 10% higher in 2021. So, getting every dollar you can in business tax deductions has never been more important.
Moreover, because you are self-employed, you cannot ignore the need for tax planning when you start your business, whether you make little money or you make a lot of money. The self-employment tax starts almost immediately, and that puts you automatically at the starting gate of taxes.
With minor exceptions, business deductions do what you expect deductions to do: They offset your business income. Further, and again—for the most part, business deductions benefit your entire return and reduce all your taxable income.
When you run a business, you have a myriad of expenses. When you recoup those expenses as business tax deductions, you are making more money without having to do more work.
Example. You have two children who are going to college in seven years. You are self-employed and have some work that your children can do for your business. You hire your two children.
You pay them $5,000 each per year during this seven-year period. At the end of seven years, here are your results: You have paid the children $70,000. The children have the $70,000 (AND they legally paid zero taxes on it).
The children are going to use the $70,000 for college (meaning you are not paying for college with after-tax dollars). You have $27,300 net cash in your wallet from your federal tax savings at a 39% rate (assuming you live in a state with no income tax, otherwise it’s even more). In other words, by knowing what you are doing, you have $27,300 more cash without doing any more work.
Because you are self-employed, you have access to the business tax deduction. You can use it as a weapon to fight taxes. How much you save (which is really less like saving and more like earning) is entirely based on your good judgment, self-discipline, and how much planning you do.
Realize that you start every year with a huge chunk of your income going to taxes. Know that you save taxes in your tax bracket, which at the federal level is probably 30%–40%. (You might have to add some for your state income tax.)
When you look at it in this light, every deduction you keep is more like extra money you have earned.
Small business owners are both blessed and cursed in the way the government sets up their taxes. Cursed because they pay a larger percentage of their net income in taxes than anyone else in the country. Blessed with business deductions that, when used properly, not only balance their taxes with those of the average employee but actually mean (if they are paying attention) that they pay a whole lot less.
In a real sense, your self-employment enables you to control the taxes you pay. If you know the rules and spend the time to use them properly, you can significantly reduce the largest expense you pay during your lifetime.
We are here to help you if you’d like to use savvy tax strategies to work smarter, not harder to keep more of what you earn.