Being self-employed has its benefits, for sure. You can enjoy the freedom and flexibility of working from where you want, when you want. Plus, you can build your own client list and reap the profits from your hard work.
But there’s also a downside — and it has to do with self-employment taxes. If you had a rude awakening filing your 2020 return, here are some strategies that can help keep more hard-earned cash in your pocket next year.
- Open a SEP-IRA. This is one of the simplest ways to shelter your self-employment income and save for the future. The SEP-IRA works just like a traditional IRA; the main difference is that this program is designed specifically for the self-employed.
- Invest in a solo 401(k). The solo 401(k) is basically the self-employment equivalent of a traditional 401(k), but you control the money and how it’s invested. Best of all, the contribution limits for solo 401(k) plans are even higher than those for traditional 401(k) plans, and maxing it out could help reduce your taxable income.
- Contribute to a health savings account (HSA). Many self-employed workers save on health insurance by purchasing a high-deductible plan. With such a plan, you may be able to reduce your taxes by pairing it with a health savings account, or HSA. An HSA lets you set aside some money, tax-free, to spend on care or care-related costs.
- Push payments into the following year. If your clients are willing to go along with it, deferring payments until the next calendar year is one more way to reduce your taxable income. You will need to settle up with the IRS eventually, but this strategy can work well if you anticipate next year’s income to be significantly lower.
Achieve the best of both worlds
Working for yourself can be great, but it can also be quite taxing. That’s where tax planning comes into play. Ask your tax advisor or reach out to us for assistance.
The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.