A generation ago, doing your taxes for the first time generally involved sitting down with one of your parents and going through a 1040EZ form. It was no big deal, and it was over in fifteen minutes. Now, with more Millennials than ever starting side businesses or working while they’re in school, doing taxes can be a little more complicated. These eight tax tips will help you keep your taxes under control.
Deduct tuition expenses
If you start a business while you’re still in school, the part of your tuition that you’re paying (not anything that your parents might be paying, or what you’re getting in grants or financial aid from the school) can often be deducted from your taxes. Even after you’ve graduated, if you continue to take classes to help you do a better job of running your business, tuition might still be deductible.
Deduct student loan interest
Once you’re paying interest on your student loans, much of that interest is also deductible. If you’re doing your taxes online, the software will generally ask you how much interest you’ve paid; if you’re doing your taxes with paper, you’ll notice a reference to your loan interest. Any student loan company to which you are making payments which include interest should send you a form with your total amount paid.
Invest in retirement accounts
Investing in retirement accounts is good financial advice, as well as good business advice. When you invest in your future through tax advantaged retirement accounts, you can often qualify for the saver’s credit, giving you a better refund. If you’re self-employed, the amount that you can contribute may be different, and it may change whether a 401k or ROTH IRA is a better choice for your investments.
Whatever you’re thinking of doing, speaking to an accountant or retirement planner is a good idea; they’ll be able to help you understand the best way to move forward, both now and for your eventual retirement.
Understand tax liabilities for your side business(es)
With the proliferation of multi-level marketing companies hosting parties on Facebook and other social media sites, as well as the many ways to directly sell items to consumers without setting up a brick-and-mortar store, or even a business website, it might feel like selling a few pieces of jewelry or doing some editing work on the side is just a hobby. The IRS agrees, up to a point, but after that point, you are expected to report your business income, and pay any tax liability to the government, just like you would with a regular job.
If you hire freelancers or have employees, there are additional tax liabilities that you may be responsible for. It’s a good idea to talk to an accountant to set up the appropriate accounts for withholding any Medicare or Social Security benefits for your employees, and to collect tax information from any freelancers before you would need to send them a 1099 at the end of the year.
Consider an accountant
For many entrepreneurs, the first person they hire to help them with their business is an accountant. If all these tax tips are confusing and frustrating, there are many online services that will help you get your business accounts in working order and stay there. You may also be able to find a local accountant who can help you get things set up.
The key is not to ignore the money side of your business. First of all, you could end up paying substantial penalties to the IRS; second, you could tank your business through cash flow issues.
Look into tax benefits of corporations
For many side businesses, operating as a sole proprietor and filing through a schedule C is just fine. For some businesses, you may pay a lower tax rate if you incorporate your business and file as a corporation. There are fees involved in setting up a corporation, however, and it is something you will need a lawyer to set up for you. Talk to an accountant to find out if this financial situation will benefit your business.
Plan for quarterly tax payments
If you are running a side business along with working a job that takes out taxes, it’s unlikely you’ll need to send in quarterly tax payments. If your primary income is from your business, however, you will probably owe taxes at the end of the year. Planning ahead and sending in your quarterly payments is key to avoiding a big tax bill at the end of the year, so set this money aside and make your payments in a timely fashion.
Review your business income before December 31
Don’t wait until March of the new year to start getting your tax information ready. By Thanksgiving, you should be looking over your income and expenses to get an idea of what your business’s gross income was, and consider whether this would be the appropriate time to make any necessary business purchases to balance your accounts.
What advice would you give to a millennial setting up their first business?