Top 10 Tax Tips for Consultants

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Taxes are a necessary evil of running your own business. We’re here to help by sharing our Top 10 Tax Tips to help you optimize your business taxes, whether you do them yourself or turn them over to the professionals (aka us).

If you need a friendly CPA who’s an expert with individuals, please book a free call with our in-house CPA to discuss your situation.

Here are our Top Ten FAQs:

I have consulting clients now and am bringing in revenue. What does this mean for my taxes!?

  • First, open a business bank account and make sure you’re keeping your personal and business finances separate.  Next, save a portion of it for taxes!  Without a CPA’s help, a good rule of thumb is to set aside about 30% of your net earnings for taxes.
  • Our general advice is to hire a professional. Just the same way you would tell your clients not to design their own website and hire a professional like yourself - when it comes to finance, taxes, and business law, take your own (and our) advice.
  • That’s where Mylance can help - we’re dedicated to making bespoke, white-glove tax service affordable to everyone.  We believe everybody deserves a qualified tax expert to help you with high-end planning and compliance, and that it shouldn’t just be available to the rich and famous.  Plus, our subscription payments are fully tax deductible :)

What expenses can I deduct for my business?

  • Tons! This is a place most freelancers don’t take advantage of: advertising, office supplies, meals, entertainment, travel and hotels, mileage, home office, child care, contract/employee labor, coaching, books, research, professional subscriptions, accounting and legal fees (including Mylance subscriptions!), health insurance, internet, cell phone, rent/coworking space, etc.  As long as the expense is ‘ordinary and necessary’, it counts - and it reduces both your self-employment taxes and income taxes.

How do I get health insurance while being self-employed?

  • You buy it personally, instead of having a corporate employer purchase a group plan on your behalf.  This means you can buy whatever insurance you want.  So if you want the Cadillac of plans (assuming you can comfortably afford it), go for it!  Check out your State’s healthcare exchange website as your first point of research to compare plans.  Plus, health insurance premiums are generally tax deductible for the self-employed.

I have children. How do I save for myself and my family?

  • First, you can deduct your child care expenses from your business income if it enables you to work. There are some limits to the amount deductible, but scoop up those tax deductible expenses.  Also, there’s all sorts of cool tax tips and tricks you can put to use if you hire your children to work for you.  They have to do substantive work in order for it to count as legit earnings, but they could do data entry, stuff envelopes, clean your home office, set-up for events, leave appointment reminder voicemails for your clients, etc.  While your 5 year old may not be able to enter data in your CRM platform, I bet she has a super cute smile and could be your Instagram model.  Get creative!

What taxes do I pay as a self-employed freelancer?

  • You’ll pay the same sort of taxes as you did as an employee - they may just be called something different.  So instead of payroll taxes or FICA, you’ll now pay self-employment taxes which are the same social taxes. However, instead of only paying the employee portion, you now have to pay both the employer and employee portions, which is a combined rate of 15.3%. You’re also still subject to federal income tax like before, but it’s not deducted from your paycheck by your employer every month.

How do I calculate how much I owe in taxes? How and when do I pay them?

  • As you’re now self-employed, you pay taxes four times per year directly to the IRS in the form of estimated quarterly payments.  These are due: April 15th, June 15th, September 15th, and January 15th (of the following year).  To calculate what you owe is somewhat complicated: you take what you’ve earned so far that year and gross-up to reflect a full twelve months, figure out the taxes on that full year’s projection, then gross-down the taxes for just what is due for that quarter/year-to-date, and make sure to give yourself credit for any overpayments applied and tax withheld/paid - oh, and after that make sure you use the ‘annualized method’ on your Form 2210 in your tax return for that year to fully execute the planning… like we said, hire someone.

Which retirement plan should I use as a freelancer?

  • It depends.  I know, that’s not the answer you were looking for. There are a number of options depending on the type of entity you have for your business and your income levels.  These options range from SEP IRA to solo 401(k), SIMPLE IRA to Roth IRA, cash balance plan to plain vanilla traditional IRA.  Some of the above can even be mixed and matched.  Consult with your tax advisor to see which option(s) is best for you.

Do I need an LLC for my business?

  • Generally, yes.  Actually, just make that a yes.  The main benefit of having an LLC is in the name itself: limited liability.  Having an LLC limits your liability by protecting your personal assets and separating them from those of the business. Even though it comes with a little more paperwork, most freelancers find that an LLC gives them greater peace of mind when running their business. After all, we would hate to see your home or kids’ college savings put at risk.

What’s the difference between an LLC and an S Corp?

  • An LLC is a legal entity and is disregarded for tax purposes - it’s as if it doesn’t exist for taxes and you still report your income and expenses on Schedule C of your personal income tax return.  An S Corp is a tax designation and allows you to be both an employee of your business and earn a W-2 wage, and at the same time be the owner/employer of the business and earn passthrough business income reported on a form called a K-1.  The biggest savings with an S Corp is that you only pay social taxes on your W-2 wages, and not on your K-1 business earnings.

I’m an S Corp. How do I determine a reasonable salary to pay myself as an employee?

  • Short answer: consult your tax advisor. ‘Reasonable salary’ is not a set formula, and instead the IRS bases it on facts and circumstances.  These facts and circumstances range from a number of factors, such as: industry, geography, years of experience, revenue levels, comparable salaries for the work, etc.  It has to be looked at holistically to determine an appropriate salary range.

As mentioned, this is a high level guide for your business. To get your specific questions answered and to address your unique situation, please book a call with our friendly CPA at your earliest convenience so you can optimize your tax bill as a consultant.

Written by:

Bethany Swartwood
Head of Tax & Business Law, Mylance

I specialize in helping businesses-of-one and start-ups achieve financial and tax compliance while saving them tens of thousands of dollars each year.

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