Do you only think about your taxes during tax season? If so, you might be making a financial mistake. Women-owned businesses and female entrepreneurs stand to save a lot of money if they’re proactive with their tax planning.
The Importance of Year-Round Tax Planning
It pays to do year-round tax planning. According to the Internal Revenue Service (IRS), sole proprietors and self-employed people should make estimated payments because the amount automatically withheld from their earnings is usually too low. If they wait until tax season, they might be penalized for underpayment.
Year-round tax planning ensures you won’t have to pay a penalty on top of what you owe the government during tax season. More importantly, it helps you manage liabilities and maximize deductions. Looking ahead to see potential changes in tax law can save you money.
How Does Proactive Tax Planning Benefit You?
If it seems like taxes are getting more expensive every year, that might be because they are. In recent years, multiple states have increased taxable income or added additional tax burdens for higher earning brackets. Fortunately, proactive planning can help you save money.
Instead of waiting until tax season to think about how much you owe the government, do your taxes every few months. Quarterly reviews ensure you have a better idea of what you’ll owe, which can guide your investment and saving decisions throughout the year. They also keep you safe from the underpayment penalty.
The amount and time you contribute to retirement accounts can impact your taxable income and credit eligibility. Proactively putting money into a health savings account (HSA) or flexible spending account (FSA) reduces the amount you can be taxed on. It might allow you to defer your tax liability to next year.
Proactively managing your business expenses year-round keeps you from making mistakes during tax season. Strategic business expense management is an efficient way to align your strategy with this year’s tax law. It helps you plan whether or not to donate, contribute to retirement accounts, pay estimated taxes and choose employee benefits.
Tips for Leveraging Tax Deductions and Credits
There are two main ways to lessen your tax burden. While deductions reduce the amount of income you can get taxed on, credits are a dollar-for-dollar reduction on the amount you must pay. Both can help you save money.
Lowering your taxable income can make you eligible for more tax credits or higher deductions. The easiest way to do this is to put money into a HSA or a 401(k) since those contributions are deductible.
Most businesses used to use the standard deduction to reduce their taxable income. As of 2022, it’s no longer available. If you want to give to charity, keep an itemized receipt of your contributions — for noncash donations, record each item’s value.
Remember to be proactive about keeping your receipts — the earlier in the year you start, the easier it will be to get your maximum deductions, credits and refunds. Besides, some of them require proof of purchase or attendance.
Tax Deductions and Credits for Female Entrepreneurs
While women don’t receive special treatment during tax season, they’re more likely to be eligible for deductions and credits. Here are some most likely to apply to female business owners and entrepreneurs.
Home Office Tax Deduction
If your home is your primary place of business, you can deduct your rent, utilities, maintenance, mortgage interest, home insurance, repairs and depreciation.
Small-Business Health Care Tax Credit
If you have less than 25 full-time employees — and pay them less than $51,000 — you can get up to 50% of their health care premiums paid. This tax credit is refundable, so you can receive it as a refund if you’re tax-exempt or don’t owe any more taxes.
Self-Employment Tax Deduction
This credit deducts 50% of the self-employment tax from your taxable income. Remember, it has to be the employer-equivalent portion.
The Earned Income Tax Credit
If your income is under $63,398 and you’ve invested less than $11,000, you can receive $600-$7,430, depending on your number of children. If you don’t have at least one child, you can still get the credit if you or your partner are 25-65.
Child and Dependent Care Tax Credit
This credit gives you $8,000 for one kid and $16,000 for two or more — as long as they’re 13 years old or younger. You can write off up to 50% of day care or child care expenses.
Business Travel Expenses Tax Deduction
If you travel for work, you can write off a percentage of almost everything you do on the trip. Transportation, hotels, meals, dry cleaning and tips are all fair game.
Adoption Tax Credit
If you started the adoption process or adopted in 2021, you could claim up to $14,440. You’re only eligible for the full amount if your modified adjusted gross income is below $239,230.
Lifetime Learning Tax Credit
You can get up to $2,000 yearly if you attend higher education or take courses to improve your job skills. This credit is refundable, meaning you can get up to $1,000 in your pocket.
Advantages of Going to a Tax Professional
Keeping up with tax law can be complicated. Federal and state governments change regulations yearly — plenty of credits, deductions and strategies from a few years ago aren’t applicable anymore. When in doubt, consult a professional.
Someone with expertise in tax law can guide you throughout the year to help you maximize your deductions and lessen your liability. More importantly, they can tailor your financial strategies to your unique situation. While some websites try to walk you through doing your taxes, a professional has accurate insight into your situation.
Stay Proactive With Your Taxes
Business owners and self-employed entrepreneurs pay taxes differently than most people, so understanding the system is beneficial. You can save thousands of dollars annually if you’re strategic with your investments and deductions.
WRITTEN BY
Devin Partida