Tax Deductible Self Employment Expenses – 3 Common Mistakes
Self employed people are allowed to deduct several expenses from their income before working out how much tax they need to pay. Sadly, most self-employed people are unaware of all the expenses they can deduct, and so most end up paying more tax than they should.
By taking the time to learn about which tax-deductible expenses apply to you, you’ll be able to claim back the maximum allowable within the law, but without increasing your chances of being audited. The following are common mistakes which many self-employed people make, and which can end up being costly in more ways than one:
1. Not Keeping Good Records Of Your Expenses
When you buy anything that is related to your work, you must make sure you get the necessary paperwork to prove that you made the purchase. This normally involves keeping the receipt. Store all your receipts in a folder, divided up into months to make it easy to find things.
Alongside this folder, you should keep a ledger detailing what you bought and why. Also write down why you think it is a legitimate business expense – although it may seem obvious at the time, you can bet that it won’t be so easy to remember several months down the line when you’re filling in your tax return!
2. Not Using Your Retirement Plan
Saving for your retirement has two big advantages. Firstly, and quite obviously, it means you’re building a nest egg for the future, so that you have something to live off when you finish your career. Secondly, you can get some fantastic tax breaks for putting your money into a retirement fund.
Self-employed people are allowed to save a large chunk of their income in their retirement fund, and this can make a big difference to your tax bill at the end of each year.
3. Trying To Do It All Yourself
By their very nature, self-employed people tend to like to do everything themselves. However, in the case of keeping your accounts, this can be a bad decision. There are a huge amount of laws and regulations for you to get your head around, and that can take a lot of time – time which would probably be better spent working on your business.
A professional accountant will already be familiar with all of these laws, and all the little intricacies involved in applying them. They will also be much more familiar with claiming deductible expenses, meaning that in the long-run they should actually be able to save you money, even after their fees have been taken into account (which in themselves are tax deductible!)
By carefully tracking your expenses, diverting your money in the most tax-efficient manner, and getting professional help, you will be able to significantly reduce your tax bill. At the same time, you’ll have extra peace of mind that you’re saving for your future, and that your tax return is as water-tight as possible.