By Daniel Korleski, MBA
All entrepreneurs should know that when it comes to taxes, you can’t afford to only think about them during tax season! That’s right, if you fall into this category, you’re no average working person—you have so much more to keep tabs on. From self-employment taxes to employee taxes to quarterly estimated taxes…it’s a lot. For optimal savings, effectively managing your tax situation should remain at the forefront of your mind.
To lend a hand, here are 5 quick ways to manage and reduce taxes as an entrepreneur. (P.S. If you’re a high-income-earning entrepreneur making over $250,000 a year, see the more advanced strategies at the end of this article.)
1. Save for Retirement
Putting money into a retirement account throughout the year has two benefits: you build wealth for the future and you lower your taxable income for the current year. It’s a double win.
For example, let’s say you made $200,000 this year and saved $50,000 of that for retirement. When you filed your taxes, only $150,000 would be considered taxable by the IRS.
The maximum amount you can contribute to a traditional or Roth 401(k) in 2021 is $6,000, plus an additional $1,000 if you’re at least age 50. (1) (Although, fair warning, contributing to a Roth IRA doesn’t lower your taxable income now. Those benefits come later when you retire.)
Because you’re self-employed, you also get access to other retirement accounts not available to the general public. For example, you can open a SEP IRA and save as much as 25% of your income (up to $58,000). (2) You may also have the option to open a solo 401(k), which allows you to contribute even more.
2. Choose the Right Business Structure
Your business structure determines the types of taxes you pay, how much paperwork you have to fill out, and your personal liabilities.
Most entrepreneurs start out as a sole proprietor or LLC, where they’re fully responsible for everything, then switch over to a corporation as their company grows and becomes more profitable.
As with most things in life, there is no one-size-fits-all business structure. It’s important to talk to a wealth advisor and CPA to see which structure makes the most sense for your business.
3. Keep Track of Deductions
It’s easy to forget about all the expenses you made throughout the year when you’re laser-focused on growing your business. But it’s important to document as much as you can throughout the year so you can take advantage of every deduction and credit you qualify for.
If you’re using a good bookkeeping system, it should be fairly easy to keep up with your income and expenses. Platforms like QuickBooks Self-Employed even categorize your expenses into a Schedule C form, so you can simply review and export it when it’s time to file your taxes.
There are dozens of expenses you can deduct as an entrepreneur. (3) Here are a few common ones:
- Startup costs
- Advertising
- Bank, legal, and professional fees
- Fees for online services and subscriptions
- Travel expenses
- Charitable contributions
- Education, research, and development expenses
- Software, hardware, and other equipment
- Health insurance premiums and medical care expenses
- Home office and supplies
- Inventory
- Repairs, maintenance, and utilities
- Retirement contributions
- Contract employees
4. Pay Quarterly Estimated Taxes on Time
When you’re self-employed, you’re responsible for paying your own taxes to the IRS in the form of quarterly estimated payments. They’re not automatically taken out of your paycheck for you as they are with W-2 employees.
This table highlights when quarterly estimated payments are typically due: (4)
| Taxes are due on… | …for money earned… |
| April 15 | January 1 – March 31 |
| June 15 | April 1 – May 31 |
| September 15 | June 1 – August 31 |
| January 15 of following year | September 1 – December 31 |
You may pay penalties and fees if you don’t pay the IRS what is owed to them, so it’s critical to stay on top of these dates.
Most entrepreneurs set aside at least 30% of their income for taxes, but this isn’t a hard-and-fast rule. The exact amount you’ll need to set aside depends on your business structure, tax bracket, state of residency, and more.
A wealth advisor can take a closer look at your situation and help you figure out exactly how much you should pay each quarter.
5. Don’t Go it Alone
This list includes just a handful of fundamental tax mitigation strategies we use with our clients. We also have many advanced strategies for our high-income-earning-entrepreneurs making more than $250,000 a year and wanting to save more than $50,000 a year for their future.
Some of these strategies include:
- Money purchase pensions
- Premium financing
- Business entities such as insurance captives
Our Cobalt Private Wealth team specializes in managing and organizing the financial affairs of high-income-earning entrepreneurs. If this describes you, we can help you mitigate some of your unnecessary tax burdens.
Are you feeling overwhelmed or confused as you muddle through important tax planning issues? You don’t have to! Rather than going it alone, we want you to experience the peace and clarity a financial professional can bring. Reach out to me at danielkorleski@cobaltprivatewealth.com or 719-332-3863 to schedule an introductory meeting.
About Dan
Daniel Korleski is the President & CEO for Cobalt Private Wealth, where he helps his clients grow, manage, and protect their wealth so they can work toward a stronger financial future. With over 30 years of experience in the financial services industry, Dan has served as the managing director for Investment Trust Company, chief investment officer for the Wealth Management Group at American National Bank in Denver, and regional investment manager for the Greater Colorado Region of the Private Bank at Wells Fargo, where he oversaw the management of over $2 billion. In 2008, he was appointed by the mayor of Colorado Springs to the City’s Investment Advisory Committee. Dan holds an MBA in investment management from Midwestern State University in Wichita Falls, Texas, a Bachelor of Science in Finance from Florida State University, and is a member of both the CFA Society Colorado and The Financial Planning Association.
Dan loves to give of his time to his community and has served as Chair of the Board of Trustees of Pikes Peak Hospice Foundation, the Board of Directors of Catholic Charities of Central Colorado, President of the Broadmoor Rotary Club and Vice President of the Board for the Pikes Peak Chapter of Trout Unlimited. Dan was born and raised in Spain and is fluent in Spanish. When he’s not working, you can find him traveling around the world with his wife of 23 years, Montse, fly fishing, golfing, and hiking with his golden retriever, Curro. To learn more about Dan, connect with him on LinkedIn.
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(3) https://www.entrepreneur.com/article/219474
(4) https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2
