There’s nothing more empowering than being able to make money from the comfort of your home. Add that to being a mom and you’re practically superwoman! But, alas, with the freedom of entrepreneurship comes the unavoidable responsibility of taxes.
Filing taxes as a work-from-home mom can get a bit complicated. With 1099 forms from various platforms, deductions, and more, there’s a lot to figure out. The last thing that you want is a huge tax bill that could have been avoided.
So, how can you prepare for taxes? What are some tips to avoid a huge tax bill? Where can you go to get help? We’ll answer each of those questions for you.
Know your business structure
The most important factor in determining what you’ll need to prepare your taxes is your business structure. As a work-from-home-mom, your business will either file as a sole proprietorship, partnership, or corporation. Even if your business is formed as a limited liability company (LLC), you will file as one of the aforementioned structures for federal tax purposes.
Based on how your business is organized, you’ll be obligated to pay different business taxes. As a work-from-home-mom, you can expect to pay both income and self-employment taxes, among others.
To learn which forms you‘ll need to file based on your business structure, visit the IRS.gov website.
You’ll want to bookmark this site so that you can refer to it when you have any additional questions about your taxes.
Get & stay organized
Success with taxes starts with organization. Being organized will not only save you time, but it may even save you money.
Here is one big thing that you should do to get and stay organized.
- Separate business finances from personal finances: To begin, you’ll want to ensure that your personal finances are separate from your business finances. This means no co-mingling of bank accounts. Instead, you should have a business bank account strictly for business transactions. All expenses for your business should be covered with money from a separate business checking account. Likewise, all business revenue should go directly to your business account and not your personal one. Separating your finances not only helps you stay organized, but it protects you in the event of legal recourse. Basically, if you get sued, mixing your finances could cause your personal assets to be at risk. There are several options for affordable business bank accounts. Start by checking with local banks or credit unions to inquire about their fees and requirements.
Use accounting software
If you haven’t done so already, begin organizing your business finances with accounting software.
Online accounting software like Wave, Freshbooks, or the more widely known, QuickBooks allows you to keep track of your income, categorize your expenses, and even send invoices to clients. This makes managing your finances a breeze. Additionally, these applications have the ability to create reports that will summarize your finances for tax reporting.
Even if you choose to hire a professional to handle your taxes, the organization and reporting capabilities provided by accounting tools make processing your information much more efficient.
If you travel for your business, consider using mileage tracking software such as MileIQ. This app integrates with accounting software to automatically capture mileage expenses for tax deductions — which you’ll want to take advantage of.
Save your documents
Keeping track of financial documents is a must when it comes to taxes. Ultimately, you’ll need to create a system for filing your documents so that they’re easily accessible when needed.
Set up virtual and physical folders specifically for all tax-related documents.
You can simply create a digital folder for tax documents using Dropbox or Google Drive. Print and store physical copies in a filing folder or binder as a backup.
Save documents such as receipts for business expenses and other tax forms that you receive.
As a rule of thumb, the IRS recommends keeping copies of tax documents for at least 3 years after filing.
Prepare to pay
The reality is that you will have to pay taxes. So why not be prepared?
The best way to avoid the brunt of an unexpected tax bill is to put money aside to pay for it as you go. Each time you receive revenue into your business, make it a habit to set aside funds to cover your tax responsibilities.
Certified Public Accountant Atiya Brown recommends putting 30% of your business’ income into a separate bank account to cover your taxes. This widely accepted 30% target is typically enough to cover your state and federal tax obligations.
As you get paid, manually or automatically have this money transferred into a savings account designated for tax payments.
State & local taxes
Depending on the type of business that you operate and the state that you operate from, you may have some state and local tax obligations. This can include sales and property taxes.
Contact your state’s department of revenue to get information on state-specific taxes that you must file for your business.
Estimated (quarterly) taxes
For a traditional employee, income taxes are withheld, or paid, from each paycheck throughout the year. The purpose of this withholding is to cover their tax obligation for the income that they receive within the year.
As someone who is self-employed, the obligation for estimating and paying these taxes falls on you. This is referred to as estimated taxes.
Unless you are receiving a paycheck from your business that deducts withholdings, you are responsible for estimating and paying your income taxes on a quarterly basis.
What you are obligated to pay will depend on several factors, including the state you live in and how much you earn. However, the IRS has provided a worksheet to help you estimate exactly how much you should be paying.
Again, in most cases, putting aside 30% of your revenue should cover your obligation.
Failure to make these payments could not only result in a huge tax bill at the end of the year, but you may also incur fees and penalties. Avoid this by knowing what you’ll need to pay, saving up throughout the year, and making those quarterly payments.
Take advantage of deductions
If you want to reduce the amount that you owe in taxes, finding deductions that apply to your business is a must. Deductions are simply expenses that can be subtracted from your income to reduce your overall tax liability. So, the more deductions that you are able to apply, the lower your taxable income.
Business owners can take advantage of several deductions when filing taxes. Some of these deductions include, but aren’t limited to:
- Home office deduction
- Business travel expenses
- Startup costs
- Office supplies
- Professional fees and services
- Advertising and marketing
With the help of accounting software, you’ll be able to categorize and keep track of how much you’ve spent in each of these categories. Having these numbers will be necessary when filing your taxes.
Know your options
Taxes can be complicated, but getting professional help is always an option. Don’t hesitate to hire a tax professional to ensure that you remain compliant with your taxes. These professionals can also help you maximize your deductions to reduce your tax burden.
Remember, you can always refer to this guide as a starting point to master taxes as a work-from-home-mom.
–By Fo Alexander