Did you start a new business in 2020?
If you’ve started a business this year, or are planning on starting one, the importance of tax planning shouldn’t be overlooked. With the freedom of self-employment, comes the full responsibility of paying taxes. Tax planning is an important tool to help you stay on top of your finances and save you money through important deductions.
Business Tax Planning and Self-employment
To get started, let’s talk about how much self-employment tax is. Currently, the self-employment tax rate is 15.3%, which covers 12.4% for Social Security and 2.9% for Medicare. A typical job from an employer would only require you to pay half that amount (since your employer would cover the other half) but self-employed people pay the whole thing. Self-employment tax applies to your profit, or net earnings and you may need to pay self-employment taxes throughout the year. Lastly, whether you have a sole proprietorship, an LLC, a partnership, an S-corporation, or C-corporation will affect your taxes differently. Here’s a quick guide to help you understand the key differences.
Self-employment offers you deductions and tax breaks that you should know. Most things that are directly correlated to your business are tax deductible. To make it simple, here’s a list of things that are included but not limited to:
- Home office (regardless of whether you rent or own)
- Internet & phone
- Health insurance (if you pay for your own private insurance)
- Business insurance
- Retirement plan contributions
- Startup costs
- Interest on a business loan from a bank
- Credit card interest
- Certain memberships (professional organizations such as chambers of commerce)
Using these deductions to your advantage is a great tool to save money on your taxes, and improve your business by investing in it further. It’s necessary to stay on top of your business expenses, so keep a folder of important receipts and documents so you never miss a deduction.
Self-employment offers a world of independence and freedom, and we congratulate you for taking the first step. As you navigate self-employment and your new business, we’d love to be by your side every step of the way. Contact us to get started!