I’m not a CPA, so I can’t give you specific money or tax advice, but I can share a few practical money and tax tips I’ve learned through 19+ years of owning my own business.
Common Tax Deductions
First and foremost, you have access to LOTS of tax deductions when you have your own business. It’s your responsibility to learn what you can and cannot deduct (legally). Hiring a CPA or trusted tax advisor is a SMART investment.
As a friendly reminder, do not try to CHEAT on your taxes. Not only is it morally wrong, but the IRS has a LOT of lawyers and experts looking for people who do that. Save yourself the hassle and just do the right thing. Pay what you legally owe, but not a penny more.
Some of the most common tax deductions you will have in this business include:
- Travel to events (hotel, rental car, food, airfare)
- Advertising (business cards, drop cards, leads, COOP, samples, ads)
- Meals & Entertainment (taking client out to lunch, having food at a home party)
- Phone & Internet (a portion of your internet and phone)
- Office Supplies (paper, ink, staples, stationary, etc.)
- Home Office (part of your rent or mortgage, utilities, home insurance, etc.)
- Vehicle Expense (business miles)
- Business gifts (for prospects and team members, subject to $25 limit per person)
- Legal & Professional Services (hiring a lawyer or accountant for advice)
- Tax Filing Fees (prorated)
This is not an exclusive list, but it covers about 95% of the common tax deductions.
What you want to to do is get organized. This is what I do.
I have a small box in my office. Throughout the month, every business receipt I get goes into that box. On the first of the month, I empty the box, sort the receipts by category, and update my profit and loss statement.
Also known as a P&L, I keep my profit and loss statement in a simple MS Excel Spreadsheet. Some people use Quickbooks or a ledger. What method you pick is up to you.
My P&L is sorted by category. I just type in my totals for each category for that month, and my profit and loss statement is updated. If I have a question about whether something is tax deductible or not, I ask a tax professional.
This takes me less than ONE HOUR per month. And it saves me a lot of time at tax season.
If you want to print off an example profit and loss statement, you can download a blank copy here. Just update the information with your info, and you are good to go.
Another thing I recommend you do is familiarize yourself with the 1040 Schedule C. If you click on the link, you can see it on the IRS website and print off a blank copy.
For most of you reading this, it is the form you will use to fill out with your business information on your taxes, unless you are a LLC or incorporated.
Make a game out of keeping EVERY receipt possible. Every receipt you lose is like throwing money in the trash.
Hire a CPA or Tax Professional. Not only is it tax deductible, but they are subject matter experts and know many deductions you might miss yourself.
Educate yourself on taxes. You don’t need to be an expert, but you do need a basic understanding. There are plenty of tutorial videos you can find on YouTube.
You do not pay taxes on your earnings. You pay taxes on your profits. For example, if you have $10,000 in commissions and $7,000 in expenses, you would pay taxes on the $3,000 profit, not the $10,000 income.
If your business loses money, that loss will be deducted from other income sources (up to certain limits) which will reduce your taxes owed.
Do not spend ALL of your commissions. Reinvest in your business the first year or two. Think of your business as newborn baby. It needs love, time, and nurturing.
As your income starts to grow to $300 to $500 per month, put aside 25 to 30 percent of your check each month for taxes. Do not spend this money. You do not want to be stuck at the end of the year with a big tax bill. And if you end up not owing anything, you will have a nice chunk of money saved.
Once your income hits more than $1,000 per month, consider paying quarterly taxes. That’s what I do.
You are responsible for paying your own taxes. They are not deducted from your commissions.
Even if you just earned $500 per month with the company, and you invested it wisely, you could still create significant wealth, especially when combined with the tax deductions.