Oh boy, tax season is upon us and the stress is real. Taking a hard look at the financial year can be overwhelming for independent professionals, especially during a global pandemic. We’ve rounded up a few simple suggestions that will help solopreneurs fly through Tax Season this year. Here we go:
1. Reach out to a certified accountant.
Unless you’re an independent accountant or financial advisor yourself, our suggestion is simple – don’t take on too much! If you’ve been running your own business for a while, chances are, you already have a dedicated accountant you work with. Don’t procrastinate or be miserly as mistakes on tax returns could cost thousands of dollars in interests, and are avoidable with expert guidance. Ideally, to avoid information shortfall you should schedule a monthly call with your accountant to go over your expenses and revenues.
2. Correctly classified your business.
As an independent contractor, are you a sole proprietor? Have you registered as an LLC? and are you accepting payments into a personal account or business account? Each business registration option attracts a different tax structure. Failing to properly classify your business could result in unnecessary over-paying taxes. If you’ve just gone independent, double or triple-check the nuances of your business registration documents before filing taxes this year.
3. Separate your personal and business expenses.
Everyone knows that it’s bad form to mix business and personal expenses. As an independent professional, though it’s easy for your personal finances to get tangled up with your business finances. Hence categorizing them correctly can be very time-consuming this time of year, especially if you’ve been ignoring them the past 365 days.
You probably aren’t the biggest fan of spreadsheets, but keeping thorough and accurate records throughout the year will ensure your tax return is correct. Your accountant will be all smiles too! Consider investing in a basic accounting software or a virtual CFO service.
4. Make sure you’re claiming the Home Office Deduction if you’ve been working from home.
Guess what one upside is to working from home? Tax breaks! You can only qualify for the Home Office Deduction now if you’re self-employed. You will not be eligible if you’re an employee of an organization, even if you’ve been working remotely and had to set up an office in your home.
To be eligible, you must have Schedule C income from self-employment and must use part of your home “regularly and exclusively” for business. This deduction can be applied to your home office, garage, part of your bedroom, etc. It applies whether you rent or own, and can be calculated based on the estimated square footage of your office area.
5. Need extra time? File for a six-month extension!
We know 2020 has been incredibly challenging for you – that’s why you might want to think about filing for a six-month extension on your federal tax return with the IRS. You can safely avoid the late-payment penalty and failure-to-file penalty by availing this option. Please note, you still must pay your taxes on time—the extension is only for filing. For 2020 taxes, you can extend from May 17 to Friday, Oct. 15, 2021. If you are not submitting your taxes by Tax Day, then you should consider filing Form 4868, the Application for an Automatic Extension of Time, with the IRS. We suggest going through your accountant if you need to file for an extension.
If you are a solopreneur and feel like you weren’t ready to prepare your taxes this year, start working on next year’s now, while you’re in the proper financial mindset. Your future self will thank you.