How to Lower Your Taxes – A Guide for Independent Contractors and the Self Employed

Starting your own business is not an easy task. It comes with many challenges and obstacles, preventing many people from even trying it. For those who do set up their own shop and make a go of it alone, there can also be many benefits. Paying fewer income taxes is one of the most powerful. This post will cover the most substantial areas for optimizing business expenses and creating the deductions that legally reduce your tax bill.

What Expenses Are Deductible?

Auto Expenses

With the widespread adoption of web-based meetings, one might be tempted to dismiss the effort to track the business use of your vehicle. Even if it appears small, it can add up to thousands of dollars that remain in your own pocket come tax time. Deducting auto expenses involves tracking your mileage, whether you use the “actual cost method” or the “mileage method”. The simplest way to track business use of your vehicle is using a mobile phone app, such as Mile Expense Log, Mile IQ, and Trip Log. All three come with free and paid versions with more features.

Business Insurance

There are many policies available to protect your business from the unexpected. These include Liability, Errors and Omissions, Property, Casualty, Workers Compensation, and more recently, Cybersecurity. (Auto falls under auto expenses.) The premiums paid for these policies are expenses you should be utilizing on your return.

Employee Benefits

While it can be complicated depending upon your situation, the medical, dental, and qualified long-term care premiums for you, your employees, your spouses and dependents younger than 27 years old at year-end are deductible. Contributions to a qualified retirement plan are also deductible, and there is a tax credit available in the first year you establish such a plan.

Entertainment Expenses

In the aftermath of the 2018 tax reform bill, many people have mistakenly believed that these expenses are no longer deductible. On the contrary, this deduction is still alive and well, albeit with a revised definition. While the days of taking clients to the theatre or sporting events and deducting the ticket costs are gone, the deduction for taking a client out for a meal remain intact.

Incorporation

Establishing a business entity comes with start-up costs, fees and expenses as well as ongoing maintenance costs. This might include fees charged by the secretary of state, the department of corporations, or the city in which your business resides. (Attorney and Accountant fees fall under Outside Services.)

Marketing Expenses

The cost of websites, social media subscriptions, social media advertisements, email marketing services, business cards, seminars, webinars, traditional advertisements, and a host of other means of promoting your business are fully tax deductible. (Certain costs such as travel, internet service, hiring a PR agency, etc., while related, fall under other categories.)

Office Expenses

The rental of office space or the home office expense – which is quite complicated – immediately come to mind for most people, but the costs of running the business within those settings is also deductible. This includes – but is not limited to - computers, software, printers, tablets, copiers, phones, headphones, wireless headsets, machinery, and job-specific equipment. Whether you purchase or lease this equipment does not affect the deductibility, just the methodology used for doing it.

Outside Services

Hiring Accountants, Attorneys, Employee Benefit Plan Providers, Financial Planners, Freelance Writers, Graphic Designers, HR consultants, Marketing and PR Agencies, Payroll Providers, Retirement Plan Administrators, Sales Trainers, and other professional service providers are all included in business expenses if you need them.

Professional Development

Perhaps your line of work requires a license, or continuing education to maintain that license. Perhaps you or your employees are taking classes designed to improve your skills or technical knowledge that you pay for. You might even subscribe to specialized magazines, newsletters, video libraries, trade journals, or internet sites related to your work. A book you purchase for expanding or maintaining your knowledge base also qualify.

Travel Expenses

There are times you must travel more than 30 miles as part of your work. Whether it is for a client meeting, continuing education, a trade show or convention, making a sales presentation, or a public appearance, the cost of getting to and from the location is a business expense. This would include things such as UBER, Lyft, or taxi fares, rental cars, parking fees, lodging and meals. (Taking a client to lunch while travelling would be an Entertainment Expense.)

Utilities

This category applies whether you rent an office or work from home. It can include electric, cable TV, internet service, telephone, water, and similar expenses to the extent they are necessary in operating your business.

Work Supplies

The office supplies you would purchase from Staples or Office Depot, including cleaning supplies and personal protective equipment can add up to a lot at tax time.

You Can, and Should, Take all the Deductions You are Legally Entitled to

The list of business expenses is far greater – and more complicated – than this blog post describes. Future posts will delve into these – and other – areas more in depth. In the meantime, having read this blog post, you have a strong introduction to the basics and can begin to have a meaningful discussion with your business coach, financial advisor, or tax professional about optimizing your expenses and lowering your taxes as much as possible – that is why the tax code exists.

One thing to remember is to ask yourself, “Is this expense customary, ordinary, and necessary for my line of work?” After all, that is the same question the IRS will ask if they audit you.

Click here to see how JMB Financial Managers can assist you in organizing, tracking, and maximizing your business expenses so you don’t miss deductions that could significantly lower your tax bill.

Recommended Reading

• 3 Tax Saving Solutions Every Top Producer Should Know
• The 6 Things You Should Ask Your CPA at Tax Time
• Record Retention Guidelines for Small Business Owners
• 3 Year-end Tax Moves for Small Business
• Why File Your Taxes Early? There are Lots of Good Reasons
• Smart Tax Tips for Professionals
• Making Expenses Easier to Track

Useful Resources

If you are still unsure what expenses are deductible, or what restrictions apply to you, here are some useful resources. TurboTax Self-Employed is designed to help you keep detailed tax records and understand what is and isn’t deductible. TurboTax also has a tax-bracket calculator that is free to use if you don’t know what bracket you fall under and a self-employed expense estimator to help you estimate how much of your expenses are deductible and increase your tax savings.  

As always, we are here to help you save money and find the financial plan that is right for you. Contact us today to schedule a complimentary consultation to discuss what strategies we can deploy to help you reduce your tax bill this year.

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About the Author

Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.

Connect with Jack on LinkedIn  or follow him on Twitter.