When you are self-employed, managing your finances is crucial. From higher taxes to not having any benefits, being your own boss requires budgeting on a daily basis. Consider the following tips if you are self-employed to save money.
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Prepare for Self-Employed Taxes
If you are a business owner, freelancer or independent contractor, you still have to pay taxes, but they are not withheld automatically from the payments you receive. You usually have to pay self-employment taxes on earnings over $400, and many have to make quarterly payments throughout the year to avoid penalties.
First, you may need to save 25% to 30% of your income to pay taxes. Keep in mind that you are responsible for paying all of your Social Security and Medicare taxes with no help from an employer. In addition, you have self-employment taxes and may have state or city taxes. Saving money at the start is important, so you can afford these taxes. There are online calculators you can use to help you figure it out.
Car Deductions
If you use a car for your business, you may be able to deduct some of the expenses on your taxes. For instance, you may be able to deduct car insurance. You may also be able to use the standard mileage rate or the actual expenses for your vehicle as a deduction. The standard mileage rate gives you a certain amount of money per mile that you drive. The actual expenses are what you pay to keep the car running for your business.
You have to choose between the standard mileage rate and actual expenses because you cannot deduct both. Most people select the one that is higher and will help them save more money on their taxes. You can use a mileage rate calculator to figure out how much you can save. The current rate is 58 cents per mile, but it changes every year.
The actual expenses you can write off include car maintenance costs, such as gas and oil, repairs and tires. You may also have registration costs, taxes, tolls, parking fees and other expenses for your vehicle. In some cases, you may be able to include garage rent.
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Home Office Deductions
If you run a business from home, you may be able to deduct some of the expenses associated with it. The portion of your house that you use must be your regular place of business. You cannot deduct your entire house or place you rent.
The way this deduction works is you take a percentage of your expenses. This can include the rent or mortgage, property taxes, utilities and maintenance costs. You will not be able to deduct the full amount of these expenses, but the percentage will help lower how much you owe.
You have the choice between the simplified or standard home office deductions. As its name implies, the simplified version is easier to take and does not require as much math. However, it may end up being a lower amount than your standard deduction if you went through the trouble of calculating it.
Other Deductions
As a self-employed individual, there are other ways to save money that can help you. You will have to track your expenses and make sure to save all receipts. For example, you may be able to deduct your health insurance costs if you pay out of pocket. If you have dependents on your plan, the cost of their insurance may also count.
Another way you may be able to save is if you put money in retirement accounts, such as a SEP IRA. You should consult a tax specialist or accountant to make sure you qualify for any deductions.
Saving and Spending
As a self-employed individual, you have to be prepared for the cyclical nature of your work. You may have times with more work than you can handle, while in other periods you may have dry spells. The key is to save enough during the good times, so you can survive the bad ones.
The amount of money you need to save will depend on your situation and safety nets. If you are single and have no financial support, then you will have to save more. If you are married, then you have to consider your spouse’s contributions. Most experts recommend having enough savings to tide you over for several months, so six months is a good goal.
When you are self-employed, saving money is part of your job in some cases. You have to budget and figure out where to cut costs consistently. You also have to be aware of the deductions you can take on your taxes. Be prepared by saving early and often, so you do not end up with penalties and fees later on.