8 Tips to Maximize Tax Refund for the Self Employed

Get these eight tips from a renowned CPAon how to maximize tax refund money to help you get the refund possible and save money in the long run.

The gig economy has plenty of members. Some work in this capacity full-time while others dabble and pursue side hustles to supplement their Form W-2 income. Others are self-employed through their own business and derive an income through their standalone business.  Regardless of your employment arrangement, there are many ways to earn money outside of a W-2 job. All require you to pay taxes, which may leave you wondering how to maximize tax refund money.

You should be aware of some of the most common ways on how to maximize tax return money as a self-employed person, whether you use a tax specialist or use one of the best tax software programs to help you. Read below for eight of the most common ways to maximize your tax return. As a note, these tips still work after the tax reform.

8.) Contribute to an Individual Retirement Plan (IRA)

investment accounts
  • Tax-advantaged retirement accounts can lower your taxable income.

Want to know how to maximize tax refunds? One of the best ways is to make contributions to your retirement accounts. Because you are self-employed, you will not have access to a 401(k) as your W-2 counterparts do. However, there are other options available to you to save for retirement in a tax-efficient way.

The most common is through the use of an individual retirement account (IRA). These accounts follow you wherever you go and are not tied to one particular employer. They are unique to you and hold the assets you choose to invest in for your retirement.

There are two types of IRA accounts: Roth and Traditional.  The former places after-tax funds in your account and all gains made are tax-free. The latter places before-tax funds into an account and does not require you to pay taxes on these funds until they are taken out of the account at retirement (or after you reach the age of 59 ½, whichever comes first).

Some other investment options available to you are Sep-IRAs, SIMPLE IRAs and solo 401(k)s. These accounts also allow you to reduce your tax bill now and grow your tax-deferred investments for later benefit.

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7.) Contribute to a Health Savings Account (HSA)

health savings account
  • If you use a high deductible health plan to cover yourself or your family with insurance, you will have access to this triple tax-advantaged account.

If you haven’t heard the term before, you might ask yourself what an HSA is and what it has to do with how to maximize tax refunds. Health savings accounts (HSAs) are accounts offered to individuals who meet certain health insurance plan criteria, namely high deductible health plans with certain deductible thresholds.

Funds contributed to HSAs enjoy a triple tax-advantaged benefit. First, no taxes are paid on contributions made to the account. Second, no taxes are made on withdrawals for qualified health expenses. Third, no taxes are paid on gains realized from funds held in the account.

Many HSA accounts let the account holder invest in certain asset classes with their account contributions. If the holder is capable of not using the funds in the account, the funds can compound over time and accumulate a lot of value down the road.

6.) Accelerate Deductions and Defer Income

defer income
  • Take advantage of any last-minute tax deductions before year end or pass on the ability to defer income until the next year.

This is sometimes not mentioned in guides on how to maximize tax refund money, but it’s a useful thing to do. Sometimes you can accelerate certain expenses to count as last-minute deductions before the year ends. You can also attempt to defer any income until the next year. Doing so will lower your tax bill.

For example, if you receive an invoice from a vendor that isn’t due until 2020 but can be paid in 2019, you might consider paying it now if it can be this year. Doing so will give you more tax savings to take against your taxable income.

You may also have completed a job for a client before year-end and can expect to receive payment before the year finishes. If you can afford to do so, delay sending the invoice for payment until the beginning of the new year. Doing so can delay income received this year and result in a lower tax bill in 2019.

However, if this affects your estimated tax payments, it might not make a significant difference in the end. Look at your own personal situation to see if this strategy makes sense for you.

If you find yourself on the borderline, your year-end strategy should focus on bunching your deductions. Time your expenses to produce lean and fat years intermittently. If you can control your timing, fit as many deductible expenses as possible into the year. This will get you a larger tax deduction and save you valuable dollars come tax time.

5.) Take Advantage of Educational Tax Credits

educational credit
  • These credits can be useful for enhancing your hard skills and growing your business.

If you want to know how to maximize tax refunds, consider going to school. Would learning some new skills through a class further your business interests? Have you been undecided about whether you should enroll in a class to advance your business? Doing so might be a smart tax decision.

Each year, any tuition payments made toward a course which teaches you new skills can qualify as a tax credit against your taxable income. Borrowing from the previous tip, you can try to pay for next year’s tuition by December 31 of this year and you can see if you qualify for the $2,000 Lifetime Learning Credit.

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4.) Get Deductions Tied to Your Home Office

home office
  • While the most complicated tax deduction on this list tied to self-employment, this can be a major tax deduction to consider each year.

One of the most important tips on how to maximize tax refunds is to pay attention to what expenses you have because of your business. The home office is no exception. Stated plainly, any expense for a workspace used regularly and exclusively for your business, regardless of whether you rent or own it, can count as a tax write-off as a home office expense. Be careful here, however. While you’re on the honor system, you may need to be conservative with your claims because anything egregious could make you subject to an IRS audit.

To defend against this outcome, prepare a diagram showing the workspace relative to the home and use accurate measurements. This will allow you to deduct the percentage this home office space represents of your home in totality. You will need to report the square feet to substantiate your deduction.

You may also deduct any expenses necessary to sustain your home office including the business percentage of deductible mortgage interest, the proportionate share of applicable home depreciation, property taxes, utilities, homeowner’s insurance and applicable home maintenance.

As an example, if your home is 2,000 square feet and your home office is 400 square feet, you may include 400/2,000 (20%) of the above expenses as a proportionate share for tax deductibility purposes.

There are two methods for calculating your home office deduction: the standard method and the simplified method.  You do not need to use the same method each year.

The standard method requires you to tally your total home office expenses each year and use this total as your deduction. The simplified method allows you to multiply an IRS-provided rate by your home office square footage.  This requires a home office of greater than 300 square feet and might also be the clear choice if you don’t have time to accumulate all of your qualified expenses.

However, these rates will vary by year and might not be as rewarding as the standard method. The decision is yours about whether you prefer one method to the other. To know if you’re getting the biggest deduction, calculate your deductions using both methods.

3.) Use the Self-Employment Tax Deduction

self-employed deduction
  • When you work as a Form W-2 employee, your employer pays their portion of payroll taxes. When you are the employer, it is your responsibility to pay both portions.

Many benefits come from being self-employed. You’re the boss, you set your own hours and you have the flexibility to grow your business how you best see fit. However, one major downside to being self-employed is needing to pay more in taxes. Specifically, payroll taxes.

In this case, we’re referring to the self-employment tax, which refers to the employer portion of Social Security and Medicare taxes.  Everyone who works must pay these taxes, unless you’ve learned how to pay zero tax on passive income and long-term capital gains.

However, when you’re self-employed, you must pay not only 7.65% (6.2% for Social Security and 1.45% for Medicare), you must pay the other half of that as well. You will also owe an additional Medicare tax of 0.9% if you make more than $200,000 as a single, $250,000 as a married, filing jointly or $125,000 as a married filing separately taxpayer.  The income thresholds for additional Medicare tax apply to self-employment income and combined wages and compensation.

For example, if you’re married filing jointly and you make $120,000 in self-employment income and your spouse makes $150,000 in wage income, you’ll pay the additional Medicare tax on the $20,000 excess, amounting to $180.

With self-employment taxes, you do get one slight break because you don’t end up paying the full 15.3%. The IRS allows you to deduct half of your self-employment tax as a business expense and therefore count as a tax deduction. In other words, you will pay self-employment tax on 92.35% of your net business income, not gross income. It might not count for much because you have to pay more taxes, but at least it’s something.

2.) Include Utilities (Telephone, Internet, Electricity)

utilities deduction
  • Any utility expenses needed to sustain your business may be deducted against your taxable income.

Some common expenses included as utility expenses are phone bills, internet expenses and monthly utility bills. However, if these utility bills intermingle with your personal expenses, you will need to use your best judgment on how much of each can be allocated to your business as a qualified tax deduction.

Some instances will be clear cut. If, for example, you hold a second cell phone plan dedicated solely to your business, you will be able to deduct 100% of that expense. On the other hand, if you have a cell phone that is used for business and personal affairs, try your best to identify the break out between your use in each area.

1.) Count Interest on Business Loans

business loan
  • Interest expense paid from a loan taken out to fund your business qualifies as a tax deduction.

If you want to learn how to maximize tax refunds, don’t leave anything out. If you took out a business loan to fund your business operations or make an investment, you can deduct the associated interest expense against your taxable income.  In many cases, you need some extra financing to get your business off the ground or to accelerate your growth.

If you find taking out a loan can help, deduct the interest. Using a credit card to finance a purchase is rarely advisable if you’re planning to carry a balance. However, being able to deduct the interest as a business expense makes the interest paid slightly less of a burden.

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Other Tips on How to Maximize Tax Refund Money

maximize tax refund

These are some of the best tips out there on how to maximize tax refund money. However, one of the best tips is to get expert help. Read our reviews of the best tax software to find an option that will help you learn how to maximize tax refunds as much as possible.

8 tips to maximize tax refund for the self employed