You have the opportunity to work for yourself and reap the rewards of being your own boss as an independent financial planner. But, along with this freedom comes the duty of handling your 1099 employee taxes and other financial matters. For independent financial planners, tax preparation is a crucial component of financial planning.
You may optimize your tax savings, assure compliance with tax regulations, and avoid penalties and fees by using proper tax planning. This post will look at independent financial advisors’ tax planning strategies and how to reduce your tax liability.
Tax Concerns for Freelancers
Your tax concerns as an independent financial planner could be different from those of an employee. For instance, you will be required to pay self-employment taxes that include Medicare and Social Security taxes. For workers, the company often pays these taxes; however, freelancers are in charge of covering these costs on their own. Also, as a freelancer, your clients will issue you a 1099 form rather than a W2 form. This form informs the Federal Revenue Service about your revenue (IRS).
It’s important to keep in mind that the tax rate for 1099 income is greater than the tax rate for W2 income. For instance, you will pay a 22% tax rate on a $50,000 wage as an employee. Your tax rate will be 28% if you work as a freelancer and make the same amount of money. As you are a freelancer, you are liable for both employer and employee taxes, which accounts for the % discrepancy.
Approaches for Tax Planning for Independent Financial Planners
1. Maintain Correct Records
Keeping correct records is the first step in efficient tax planning. Although your income and expenses may ultimately affect your tax liability, you should keep track of all of them. It will be simpler for you to file your taxes and prevent IRS fines or audits if you keep proper records.
2. Pay your estimated taxes
You are in charge of paying estimated tax payments as a freelancer. As a result, you will have to pay your taxes on a quarterly basis rather than once a year like an employee. If you anticipate owing at least $1,000 in taxes when you submit your tax return, the IRS requires you to make anticipated tax payments. You can use the IRS calculator for anticipated tax payments to figure out how much you owe.
3. Determine Tax Deductions
Finding tax deductions is another approach to reduce your tax obligation. Tax deductions are costs that you are permitted by the IRS to deduct from your taxable income in order to lower your tax liability.
Independent financial advisors’ business-related expenses, such as office rent, phone, internet, travel costs, and more, may be tax deductible. The price of professional development seminars and continuing education classes is also deductible. You can lessen your taxable income and, consequently, your tax obligation by locating tax deductions.
4. Make a retirement account contribution
Another method for independent financial advisers to reduce their tax burden is to make contributions to retirement accounts. You can make tax-deductible contributions to retirement plans such as individual retirement accounts (IRAs) and Keogh plans. Your taxable income is decreased by these donations, which lowers your tax obligation.
5. Make use of a self-employment tax calculator
You must utilize a self-employed taxes calculator while completing your tax return as a freelancer. You can use this calculator to estimate your tax liability. Your income, deductions, self-employment taxes, and other elements that affect your tax obligation are all taken into consideration by the self-employed taxes calculator.
Tax preparation is crucial for independent financial planners. By maintaining compliance with tax regulations, tax planning enables you to reduce your tax liability. Independent financial planners can utilize a variety of strategies to lower their tax obligations, such as maintaining proper records, paying anticipated taxes, looking for tax deductions, making contributions to retirement plans, and using a self-employed taxes calculator.
In order to achieve accurate tax preparation and prevent any potential tax concerns, freelancers should obtain professional advice.