One of the best perks about working for someone else is the retirement benefits: many established companies offer pensions, match you on 401(k) contributions, or have high-deductible health care plans that give you the opportunity to invest in HSAs. You don't automatically get those perks when you're self-employed, but what you can do is build them for yourself.
How can you plan for retirement when you're self-employed?
No matter what the state of your employment, you can always invest in your IRAs. Traditional IRAs are pre-tax and can help keep your taxable income in just the right range for any other tax strategies you're using. Roth IRAs are post-tax, which means you pay taxes on that income the year in which you made it, but you can tap into your contributions if you absolutely have to.
You can also create a solo 401(k). This retirement account functions just like the 401(k) you might have had at your previous job, but you get a lot more freedom. You can choose the investment company, pick from a wider range of index funds, and even contribute more: if you're both the 'employer' and 'employee' of a business you run by yourself, you can contribute up to fifty-three thousand pre-tax dollars or no more than 20% of the earned income plus an additional eighteen thousand dollars. This plan also allows for Roth rollovers for additional tax flexibility.
What does this have to do with taxes?
Business taxes are high, especially if your business falls square in the 'small business' category. That makes your actual income smaller. Running a business on your own is already risky because you don't have access to group healthcare plans or a corporation paying half of the qualifying taxes. Putting some of your income away into retirement accounts now lowers your current tax bill and your future one.
But if you're taking the plunge into running your own business and putting the profit away in independent retirement accounts, the most important step you can take for running the back-end of your business is to document everything. Even if you're your only employee, make sure you have a spreadsheet, a dedicated card, and clear financial records for every travel expense, office purchase, and penny you make.
Why is documenting everything so important?
If you're self-employed, you have access to a large number of deductions that can help make those first rocky years of business easier to manage. However, the IRS digs a bit more deeply into many self-employed deduction claims and the tax benefits of retirement accounts, so you need to have a record full of every scrap of proof in case you're flagged for an audit.
Documentation also helps your tax professionals find deductions you might not have known about. While you might have read up on a home office deduction and travel deductions, a tax advisor can help point out the small details that add up over time. They can also help you select the backup documentation that makes your tax return clean, ironclad, and easy to defend.
If this is your third year of business, a few years of thorough documentation can even make your previous tax years better. The IRS allows for tax amendments that let you correct or adds claims for credits and deductions, so if you learn something new about your taxes that you could have used a year ago, it's not too late.
Just like with all investments, self-funded retirement accounts have complicated regulations and tricky rules to navigate. Contact MSM Accounting and Tax Services, LLC about the best way to lay out your self-employment retirement infrastructure.