Saving for taxes can be quite a tedious balance.
Too little in savings and we’re scrambling to come up with the money for our payment, while too much in savings is capital we could have used for other projects. Furthermore, knowing how to expense as a self-employed individual is something a lot of people miss the full value they could capture, leaving them overpaying on taxes for certain expenses they’re incurring regardless.
When factoring in Covid-19, learning how to save for your 2020 taxes in Virginia can be quite the doozy, which is why we’ve broken everything down step-by-step. Check them out below:
Have you been self employed before?
The easiest way to gauge how much to save is by looking at your previous years’ self-employment taxes, which will provide the most accurate depiction of your expenses (depending on your occupation).
If you haven’t been self-employed before, then no sweat. For most, the starting point for write-offs are already expenses you’re incurring anyways, such as your cell phone, (a portion of) rent, and meals with potential clients. As one of the benefits of self-employment is writing off basic necessities, this is usually where people start to see a difference (unless the standard deduction is more than your individualized expenses).
How expensive is your business?
Gauging how expensive it is to run your business starts with average expenses. Essentially, anything you pay for that serves a clear function of conducting your business in the eyes of the IRS doesn’t count against your income. For example, your cell phone bill is a necessity, as well as the square footage of your apartment that your workspace occupies (not the entirety of your rent, unfortunately). Running through a list of write-offs will help gauge what type of cash flow your business has, as well as what your income genuinely looks like to the IRS.
…set aside an extra 10 to 20 percent of your income for incidentals or improvements…
Ballpark benchmarks.
Once you’ve established your average expenses, it’s smart to assess a few benchmarks of savings. Depending on your income, it’s helpful to set aside upwards of 20 to 30 percent (expenses aside). As it currently stands, the average self-employment tax for the state of Virginia is 6.2 percent, which when you include the full federal and other taxes, will come out roughly to that 20-25 percent mark. The rule of thumb with this is to create a level that’s safe, focusing on ‘big picture’ rather than trying to hammer out how much you can squeeze from a simple meal (however, if you did want to track those expenses, apps like Keeper Tax are excellent to use). Tax savings should be about progress throughout the year so you don’t have to settle everything all at once.
Set aside for a rainy day (including Covid-19).
As Covid-19 has been almost everyone’s ‘rainy day’, it’s understandable if you’re a little behind on savings. On the bright side, as the crisis has rocked a lot of the financial industry, interest rates for saving accounts are at great levels. If you’ve got in your budget, set aside an extra 10 to 20 percent of your income for incidentals or improvements, as it’s well worth the rate you’re buying into now.
Consider alternative ways to make your money.
Finally, one suggestion we always make to self-employed individuals and freelancers is to study new ways to move your money. A smart way to approach this is by looking at what you’re already spending, as well as how it can be replaced. For example, if going out to cafes is costing you considerably each month, then perhaps replacing that with a co-working membership, where your coffee (as well as other amenities) is much easier to write off. Similar principles go for travel and equipment expenses, where we’re essentially moving money you’re already spending into channels that the IRS looks at as expenses.
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