Strategies for Entrepreneurs and Contractors Paying Taxes in 2020
As an entrepreneur, what strategies can you put in place to help you prepare for the next tax season?
As an entrepreneur, you’re tasked with running a complete business, including hiring and firing, scheduling, cash flow analysis, vendor payments, and much more. On top of it all, paying taxes can be a huge burden—both financially and administratively.
Fortunately, there are strategies to put into place now as you prepare to pay 2019 taxes in 2020. With the right plans, you can do what you do best—spend more time on running the business, and enjoy the flexibility that comes with being a business owner or contractor.
Making changes to your business structure
There are certain tax benefits if you decide to change your business structure. For example, if you run a sole proprietorship and your personal and business income are no different, your assets and liabilities are not tied to the business, and you’re responsible as an individual for them.
If you run a limited liability company (LLC), your personal assets and liabilities are separate from that of your LLC. You can pass through your profits as income on your personal tax return without paying tax on it at the business level. But self-employment taxes may still apply.
Because there are pros and cons to each type of business structure, it’s best to discuss your options with a tax professional who can help you manage your specific circumstances.
Get on top of your quarterly tax payments
Some self-employed individuals may become frustrated by the required quarterly estimated taxes that entrepreneurs have to pay. This is a requirement since you don’t have an employer who’s paying taxes on your income as you receive it. (Note that you may not have to pay quarterly taxes if you do have tax withheld on the main salary.)
Throughout the year, you’ll need to pay four estimated tax payments, and at the end of the year, adjustments will be made based on your actual income and deductions. If you fail to pay quarterly, you could see tax penalties.
Plan these payments out in advance by marking your calendar when the four payments are due, and make sure you save enough to cover these quarterly payments. You then have the option to pay online quickly via the IRS website.
Understanding the elimination of the shared responsibility payment
This year, the shared responsibility payment, also known as the individual mandate penalty, is eliminated. That means if you can afford health insurance but fail to get coverage, you’ll no longer have to pay a penalty under the Affordable Care Act, which initially created the mandate.
Using the per-person method, the fee in 2017 was $695 for adults and $347.50 for children under 18. In both 2017 and 2018, the penalty was 2.5 percent of household income using the income percentage method.
However, be aware that this is a federal tax change. You still could live in a state that requires you to have health insurance, and so a fee may still apply to your state tax return. Massachusetts, Vermont, New Jersey, and Washington, DC, moved forward with their own state-level mandates after the federal requirement was eliminated.
While this could be good news come tax time, make sure you fully understand your state’s requirements regarding health insurance to better plan for 2019 taxes.
Plan out spending and write-offs ahead of time
Another strategy to implement is to plan ahead for expenses and write-offs. For example, if you need to purchase new equipment that can be written off as a business expense, plan that out with your tax professional so that major purchases are impacting your taxes positively.
Also, make sure you’re taking advantage of all of the tax breaks available to you. This can include utilities, office supplies, your home office, inventory costs, business insurance, your car (if used for your business), and many more.
Getting the best deduction
The standard deduction went up for the tax year 2019. Joint filers’ standard deduction is now $24,400, and for single taxpayers, it’s $12,200. However, there are strategies you can take to get the most out of your deduction by itemizing instead of going the standard route, including combining applicable deductions into a single year to get a bigger deduction.
This works out great if your itemized deductions are nearing the standard deduction limit. Then, though you’d have fewer deductions the next year since you bunched them into the previous tax year, you could still take advantage of that high standard deduction instead of itemizing.
When creating your tax strategy for 2020, it’s always smart to discuss your circumstances with a tax professional. Every entrepreneur is different, so there isn’t one simple answer. Meeting with a professional ensures you’re paying the least amount of tax legally possible and preparing your specific business for future success.
Talk to the professionals at Provident CPA & Business Advisors today to get started on tax planning for the upcoming year.