If someone asked you to name 100 of your favorite activities, “Doing my taxes” probably wouldn’t make the list. Hell, you might not ever add it to your list, even if it was 1,000 items long. It is safe to say that unless you do taxes for a living, not many people are excited about or interested in taxes. At the same time, as a lash artist and/or a last business owner, it is important to be proactive about your personal tax situation — especially as tax season edges ever closer.
It is especially crucial you are knowledgeable about the current tax laws; there have been a number of changes to these laws, and some of them will impact your tax situation as a business owner or lash artist. For example, there are new limits on deductions for state and local taxes, such as higher standard deductions, but no more personal and dependent exemption deductions.
In order to help save money in 2019 and make sure you are making the most of every possible deduction and opportunity to reduce any tax payments, consider the following five tips:
1. Choose a Tax Entity for Your Business (If You Haven't Already)
There are two main types of corporations: the S-Corporation and the C-Corporation. There is also the LLC, which stands for limited liability companies. Basically, every corporation is considered a C-Corporation when it is formed with the Secretary of State. A C-Corporation will file a corporate tax return and will pay taxes on the profits. An S-Corporation has the ability to limit self-employment tax, which can result in some nice tax savings, but the C-Corporation typically features tax rates that are lower than personal income tax rates. If you decide to register as an LLC, it is very flexible in how it can distribute profits, which allows business owners to distribute these amounts in ways that are advantageous to them.
2. Put Money into an IRA
If you make a deductible contribution into a traditional IRA or Roth IRA will allow you to lower your tax bill. The deadline to make this contribution is April 15, 2019, and for 2018, the maximum IRA contribution you can make is $5,500 or $6,500 if you are 50 or older by the end of the year. If you are self-employed, you can contribute $55,000 to a SEP and Keogh account. The amount you save by making these contributions will vary; if you are in the 25 percent tax bracket and make a deductible contribution of $5,500, you will save $1,375 in taxes the first year. In other words, you are saving for your own retirement and keeping your hard-earned money while also reducing your tax burden — a win/win all around. As for how and where to open an IRA, Nerd Wallet notes you can do so online in a few easy steps; if you are a hands-off investor, Wealthfront and Betterment and their robo-advisors are a great option. If you are more hands-on, Merrill Edge and E-Trade are both solid choices.
3. Itemize Deductions
When it comes to filing your taxes, there are two types of deductions: standard and itemized. The standard deduction is a fixed dollar amount that reduces the amount of income that you are taxed on.
Itemized deductions also reduce the taxable income and can include large out of pocket medical expenses, mortgage interest on your home, and large unreimbursed expenses for work. You can use these itemized deductions to help boost your tax refund and/or reduce the amount of taxes you owe — for instance, car registration is typically also a deductible amount, as are amounts you give to charity. So if you are “Marie Kondo-ing” your home and will donate a bunch of clothing and books to charity, you can deduct the fair market value of these items. Also, if you spend money to prepare your taxes — either with an accountant or a software program — you may be able to deduct this fee as well.
4. Create an Easy-to-Follow System for Organizing Your Tax Records
Tax time typically involves going through mountains of paperwork. If you have a huge box filled with a variety of receipts, bills, and other forms related to taxes, it is easy to understand why tax time is so overwhelming.
Instead, follow Fool.com’s advice and go with an easy peasy three-folder tax filing system. Folder one should have income paperwork and data — everything that is reported to the IRS. In folder two, put all expense and deduction info, including medical bills, un-reimbursed work receipts, and donation records. In folder three, put anything related to your investments including Roth contribution records. Turbo Tax suggests upping the organizational ante a bit and buying color-coded folders so you can easily identify where everything should go — you can also break down folder two into additional folders if you would like, including one for child care expenses, one for business expenses and one for your vehicle usage.
5. Consider Increasing Your Business' Estimated Tax Payments
While it may seem daunting to pay out more money during the year to the IRS, especially if you are an owner of a new lash business that is just getting off the ground, it can save you big bucks in the long run and/or a huge tax payment in April. This IRS.gov article does a great job of explaining how people must pay taxes as they earn money throughout the year, not just at tax time. So if you are self-employed as a lash artist and are not automatically having money taken out for taxes, try to make quarterly payments, increasing the amount to as much as you can possibly swing. This way, when tax time comes, you will have already paid out a significant chunk of what you owe, and you should also avoid any penalties for not paying enough.
The More You Know About Taxes, the Better Off You Will Be
As you start organizing your paperwork for this year’s tax season and looking ahead to next year when you will file for 2019, it is a good idea to keep these tips on hand and review them periodically. You can also learn more about budgeting your money from Lash Affair’s post, Manage Your Money Like a Boss. By incorporating these five tax tips and keeping close tabs on your income all year long, April will no longer be a scary and stressful time of year.
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