What percentage of your clients are sole proprietors, members of LLCs, and owners of S corporations? I would wager that number has grown recently. After all, one in three Americans is currently self-employed.
The fact is that by 2020, the independent workforce is expected to grow to be 40 percent of the workforce. As such, many self-employed clients will be grappling with Schedule Cs, forms 1065 or 1120S, and various other tax documents for the first time.
They probably tried a “do-it-yourself” approach but ran out of time or patience. They are knocking on your door because they want professional help – and because they are terrified of a big, hairy tax bill or an audit notice from the IRS.
Below are four tips to embrace this new wave of self-employed clients.
1. Focus on Deductible Business Expenses
Most self-employed professionals know the concept of taxable income (earnings minus deductible business expenses). If you can spot credible deductions, you’ll help your clients make a dent in taxable income and put in place tax strategies for the following year.
There are hundreds of potential deductions available to self-employed professionals, but two categories deserve your utmost attention:
Most Common Deductions
- Housing cost used exclusively for home office (including rent or mortgage, upgrades like a fresh coat of paint or new desk, and relevant utilities)
- Travel and lodging if related to attending a conference or meeting a client (includes airfare, bus or other public transit fare, taxis, rental car, and mileage for your own car)
- Health insurance premiums (unless there is eligibility through a spouse’s employer)
- Tax preparation costs
Least Known Deductions
- Purchase price of qualifying equipment, computers, office furniture, and software through Code Section 179
- State and local taxes (deducted on federal tax returns)
- Commissions paid to contractors or partners
- Interest on a business loan from a bank
2. Coach Good Habits
John Irving, the novelist, said, “Good habits are worth being fanatical about.” Pick two or three habits that best represent your view of healthy tax planning and make a point to discuss these with your clients. Here are a few best practices to help your self-employed clients reduce stress during tax season:
- Set aside 30 percent of self-employed earnings each month for taxes.
- Start paying estimated quarterly tax payments.
- Stash extra savings in a tax-deferred retirement plan.
- Send 1099s to contractors.
- Get liability insurance protection.
- Identify when to modify business structure to partnership or corporation.
3. Embrace Cloud Accounting Technology
Bookkeeping is the foundation of financial reporting and tax preparation. Yet, self-employed professionals want to focus their efforts on building the business instead of keeping the books.
This is where technology shines: Bookkeeping can be a by-product of running a business through best-in-class small business cloud accounting software.
For example, when self-employed professionals use cloud accounting software to invoice clients and pay bills online, it’s akin to outsourced bookkeeping. The software produces profit and loss statements, accounts receivable reports, and even journal entries that help you access the information you need.
4. Help Them Anticipate 2017 Changes in Their Taxes
We know 2016 was a turbulent year for many Americans – so much so that they may have overlooked some of the changes in the tax code. It’s your job to walk your clients through these updates so they’re not overwhelmed.
Some changes self-employed professionals can anticipate seeing:
- Refunds may be delayed: Sole proprietors or business owners who received pass-through income from a partnership, LLC, or S corporation – and claim the Earned Income Tax Credit or the Additional Child Tax Credit – may have to wait a while for their refunds this year.
- Increased Affordable Care Act penalties: As you know, the Affordable Care Act mandate requires that all taxpayers are to have health insurance, unless qualified for an exemption. Many independent workers don’t have health insurance – and as their income increases, so does their penalty.
- Taxes on high earners will rise: For people who earn more than $118,500, self-employment taxes will increase in 2017. The reason? A substantial increase in the maximum amount of wages that will be subject to this year’s 6.2 percent Social Security tax, which is known as the Social Security Wage Base.
Here’s the bottom line: The tax code is complicated. Deductions for business expenses are more complicated than the one-line descriptions above. This leads many self-employed professionals to deduct fewer expenses than they should. Your expertise and the one-on-one relationship you build with your self-employed clients can make a critical difference in the success of these small, but mighty, businesses.