money

6 Ways Entrepreneurs Pay LESS Taxes Than Most People

Ian Chandler

WealthFit Contributor

Being an entrepreneur comes with its fair share of awesome benefits. Thankfully, most of these benefits are tax-related. No one likes tax time, but if you plan ahead, you’ll be much better off when Uncle Sam comes calling. That’s because entrepreneurs get some juicy tax benefits that everyday employees don’t have access to.

You know how unique it is to be an entrepreneur. You can set your own hours, work from home, and make connections all over the world.

But if you’re used to the 9-to-5 grind—and the financials that go along with that—you probably haven’t thought much about the tax advantages of entrepreneurship.

If you’re an employee, taxes are fairly straightforward. That’s because your employer deducts taxes from your paycheck before you ever see it. So when you finally get your payout, you’ve lost about 20 percent to the government.

However, if you’re an entrepreneur, the tables are turned. You get 100% of your wages and then pay the government.

Here’s the upside of that. Since you deduct taxes from your own pay, you can take advantage of several tax benefits that are only available to business owners. That means before you ever pay taxes, you can reduce the amount you owe by using these tax breaks.

Curious? Here are 6 tax savings opportunities for entrepreneurs. (Of course, we’re not financial advisors, so this information doesn’t replace what your CPA tells you.)

Business Owner Deductions You Need to Know

1. Deduct your home office (and the expenses that come with it)

This tax perk gets a lot of air time, but despite that, so many entrepreneurs don’t actually take advantage of it. The bottom line is that if you work from home, this is one write-off you absolutely shouldn’t miss out on.

To qualify for the deduction, you just have to have a home office––that is, a portion of your residence that is solely used for business. Buy if you do business both at your home office and elsewhere, don’t worry.

As long as you use your home office “substantially and regularly to conduct business,” you’ll be fine.

There are two methods that you can use here: the simplified option and the regular method. While the simplified option is easier, the regular method might be your best bet. That’s because when you use the regular method, you can deduct the actual expenses of your home office.

According to the IRS, these expenses might include “mortgage interest, insurance, utilities, repairs, and depreciation.” So if your home office has a fair share of deductible expenses, the regular method will be much more beneficial for you.

If your home office is significant in size––for example, if you use an entire room or even a large section of a room––you’ll see some nice returns from this deduction.

2. Deduct your business expenses

Your home office isn’t the only thing you can deduct. In fact, as an entrepreneur, you can deduct a lot.

Now, the tricky part is knowing what you can deduct. This is where consulting a knowledgeable CPA will come in handy. Still, if you’re aware of all the possible deductions, you can get a better idea of which ones you’re eligible for.

To take full advantage of this perk, you’ll need to do a fair amount of research. Not all deductions are obvious; for example, you may be able to deduct some entertainment expenses (like the cost of taking a client out to a promotional event) but the IRS doesn’t broadcast that information.

The key here is to read through IRS Publication 535 on Business Expenses. This resource lists the various expenses that can be deducted. It’s a hefty amount of content, but the handy sidebar will help you navigate the document.

You owe it to yourself to take some time and research your deductions. You might be surprised at just how much you can deduct!

3. Reduce your taxable income by saving for retirement

Getting a tax write-off just for saving up for retirement seems too good to be true, but thankfully it isn’t!

There are a couple layers to this one. First, when you put money toward your IRA, it generally won’t be taxed until it’s distributed. This is the case for traditional IRAs, while qualified distributions from Roth IRAs are actually tax-free.

But let’s talk about the more immediate benefits. If you have a traditional IRA, you may be able to deduct your contributions up to a certain level. Your total contributions can be up to $5,500 if you’re under 50 and up to $6,500 if you’re 50 or older. Go over those limits, and you may be taxed on the excess, so be mindful of that. (Note that this only applies to traditional IRAs; Roth IRA contributions aren’t deductible.)

Again, the key to making the most of this benefit will involve reading the fine print, but it’s definitely worth it. You’re not just shaving dollars off your tax owed––you’re investing in your future.

4. Deduct your out-of-pocket health insurance costs

When it comes to tax benefits for entrepreneurs, this is one of the best. You’ve likely paid a good amount of health insurance costs out of pocket, and if you have, you may be able to deduct them.

Medical, dental, and qualified long-term care insurance all may be eligible for this perk. Even better, you may be able to deduct insurance costs you paid for yourself, your spouse, or your dependents. The IRS has more information available in this section of Publication 535.

Business Structuring Benefits

5. Lessen your tax liability by choosing the right legal entity

Depending on how long you’ve been an entrepreneur, you may or may not have a specific legal entity set up. Surprisingly, this can have a big effect on the taxes you pay.

There are several basic business entities types. Each type of entity deals with taxes differently, so if you’re not using the right entity for your situation, you could wind up paying more in taxes than you need to.

If you choose the entity that best fits your business, you can substantially save on taxes. Again, consulting with a CPA or even an attorney will be invaluable. A qualified professional will be able to help you choose the right entity for you and save the most on taxes.

6. Get the most from your profit by paying yourself

Being your own boss is one of the best and most challenging things about being an entrepreneur.

For example, it can be weird to think about paying yourself. But often, entrepreneurs pay themselves last. It’s crucial to know how to pay yourself, and there are a lot of factors that come into play here.

First, your business entity will greatly affect your options––all the more reason to choose the right entity for you!

Second, for best results, separate your personal and business finances. This means opening up a new business account with a bank (and maybe even a credit card or two).

Finally, decide the best way to pay yourself. As strange as it may seem, paying yourself a salary is an excellent option in most cases. Just make sure you’re paying yourself in a structured fashion.

Start Crushing Your Taxes

Being self-employed means getting more tax breaks, but you have to work for them a little. Getting personalized advice from a CPA is best, but first, it’s worth doing some research on your own.

With this information, it should be easy to find which perks you can take advantage of, so go forward and save money!

Share

Written By

Ian Chandler

Ian Chandler is the author of The No B.S. Guide to Freelance Writing and writes about marketing, entrepreneurship, and freelancing.

Read more about Ian

RELATED TRAINING

 in 

MONEY

podcast
Making Money With a Book

In this page turning episode, Founder of Best Seller Publishing, Rob Kosberg joins Dustin and discusses his tips to becoming a Best Selling Author and the steps you need to take to write and publish the ideal book that positions you as a thought leader in your field.

Making Money With a Book

Listen Now
podcast
Earn Higher Yields, Pay Off Debt and Succeed in Business

In this episode, Jordan Goodman, America’s Money Answers Man, provides an enormous number of practical strategies and resources to help you boost your returns, eliminate debt faster and run a successful business. He's a personal financial journalist, host of the Money Answers Show and editor at moneyanswers.com.

Earn Higher Yields, Pay Off Debt and Succeed in Business

podcast
Wealth Can't Wait

In this wealth driven interview, Dustin sits down with David Osborn, New York Times best selling author of Wealth Can’t Wait and co-owner of one of the top real estate brokerages in the world, to discuss his journey to financial freedom and the well-cultivated methodologies that helped him get there.

Wealth Can't Wait

article
How To Graduate Debt Free

Learn how to graduate with NO student debt by thoroughly researching a career, winning free money, and picking a major with a high ROI.

How To Graduate Debt Free

Erica Gellerman

Read Now
article
The Most Effective Tax Strategies To Reduce Taxable Income

Learn how to use tax strategies to keep more of the money you earn. Learn how to use both personal and business tax deductions.

The Most Effective Tax Strategies To Reduce Taxable Income

Alyssa Grossbard

Read Now
Master Your Cashflow

Master Your Cashflow

How To Turn Financial Chaos into Financial Peace By Taking Control of Your Cashflow

Dale Gibbons

Watch Now
Financial Adulting

Financial Adulting

The 20-Something's Guide to Debt, Investing, and a Wealthy Life

Ellen & Micah Long

Watch Now
Zero Student Debt

Zero Student Debt

How To Make a Smart College Investment and Graduate Debt-Free

Ellen Long

Watch Now
podcast
unHustling - Work Less, Earn More

Join Phil Newton as he and Dustin discuss how to de-stress your life and achieve work-life balance while increasing your income.

unHustling - Work Less, Earn More

article
How To Improve Your Credit Score In 30 Days

Want to improve your credit score fast? Learn 3 different strategies to improve your credit score in 30 days or less.

How To Improve Your Credit Score In 30 Days

Michelle Black

Read Now
Pay Less Taxes

Pay Less Taxes

How To Legally Reduce Your Taxes By Up To 40%

Tom Wheelwright

Watch Now
Money 101 for Teens

Money 101 for Teens

The Ultimate Guide To Making, Spending, Saving, and Investing Money

JP Servideo

Watch Now
podcast
Wealth Acceleration

Learn how Stuart Arakelian recovered and prospered from the 2008 financial crash—and how it impacted his philosophy on wealth management.

Wealth Acceleration

Building a Strong Financial Foundation

Building a Strong Financial Foundation

How to Protect Your Ass(ets), Save Smarter, And Start Putting Your Money to Work

Stuart Arakelian

Watch Now
Intro to Credit

Intro to Credit

How to Get Started, Boost Your Score, & Leverage Credit to Build Wealth

JP Servideo

Watch Now
podcast
Timely Tax Benefits, Wealth Preservation & Leverage

Preserve your hard-earned wealth. Learn to use tax advantages to your benefit and leverage trusts with Supreme Court Counselor Lee Phillips.

Timely Tax Benefits, Wealth Preservation & Leverage

podcast
Cutting the Cable

What’s the cable cutting movement all about? Cable Cutting Academy's Jeremy Edmonds discusses tech and finance hacks to save you money.

Cutting the Cable

article
Pay Off Your Mortgage With a Credit Card: When Does It Make Sense?

Paying the mortgage with a credit card is becoming a more popular strategy. But is it a good strategy?

Pay Off Your Mortgage With a Credit Card: When Does It Make Sense?

Justin McCormick

Read Now
podcast
How To Negotiate a Higher Salary

Want to boost your salary? Rich Jones and Marcus Garrett help you determine your financial worth. Negotiate for the life you deserve.

How To Negotiate a Higher Salary

article
Why You (Probably) Don’t Need Dental Insurance

Your smile is an invaluable asset. But some dental insurance plans cost you more than they save.

Why You (Probably) Don’t Need Dental Insurance

Andy Proper

Read Now
article
How to Buy Car Insurance & Get The Best Deal

If you don’t know what your car insurance plan covers—now’s the time to find out. You’ll be surprised by how much you can save.

How to Buy Car Insurance & Get The Best Deal

Nathan Wade

Read Now
article
Cut the Cable (Bill) - 10 Alternatives to Cable Television

Cutting your cable bill is an easy way to save tons of money. If you have home internet you already have access to on demand entertainment.

Cut the Cable (Bill) - 10 Alternatives to Cable Television

Lance Cothern

Read Now
article
Budgets for the Service Industry: How to Budget When You Work for Tips

Learn how to budget when you work for tips. How to take control of your finances in the service industry.

Budgets for the Service Industry: How to Budget When You Work for Tips

Jill Huettich

Read Now
Freeing Your 401(k)

Freeing Your 401(k)

How to Route Your Retirement Funds into Passive Investments

Andy Tanner

Watch Now