Being your own boss creates big opportunities for tax savings — but only if financial advisors and their clients understand all of the complex rules surrounding self-employment, experts said.
Financial Planning compiled the below list of two dozen tax tips for self-employed clients by speaking with five advisors and tax professionals about retirement plans, business structures and deductions available to business owners and independent contractors. Since they’re not having their taxes withheld automatically, they should be aware that they will usually need to begin making quarterly payments to the IRS rather than once a year, according to Calley Bjorkman, the tax lead advisor for Seattle-based Brighton Jones.
“Overall the takeaway is your taxes will get a little more complex once you do become self-employed,” Bjorkman said in a webinar about self-employed tax strategies held by the firm earlier this week. “When you are an employee, you might incur expenses for the business you’re working for that could be reimbursed. So you’re tracking those expenses in which to get reimbursed. But when you are self-employed, you also have a lot more options of what tax deductions you can actually take, meaning there’s more tracking of those income and expenses.”
Besides the rising number of independent contractors working for Uber, DoorDash or other mobile-application technology firms, the ranks of self-employed clients can include lawyers, consultants, athletes collecting endorsement deals or even social media influencers, according to Chelsea Ransom-Cooper, head of wealth management and financial planning at Philadelphia-based Zenith Wealth Partners.
Brand ambassadorships, public appearances or merchandise sales from athletes or entertainers starting their own clothing line could also qualify a client as self-employed, said Brandon Williams, a director and wealth advisor with the TRUE Cresset | Sports + Entertainment division of Chicago-based Cresset.
“It is important to consider estate planning, retirement planning, proper insurance planning and residency planning,” Williams said in an email. “All of these areas lead to tax strategies that a tax professional can model out for you.”
The group of self-employed clients extend to physicians and other high-earning medical professionals — a niche served by Alexis Gallati, the founder of Knoxville, Tennessee-based Cerebral Tax Advisors and Andrew Altfest, the president of New York-based Altfest Personal Wealth Management.
“While their wealth can grow, business owners often feel pinched because they don’t want to draw on their assets fearing adverse tax consequences,” Altfest said in an email. “Tax strategies to reduce tax liability include Roth conversions, particularly in low-income years such as just after retirement, qualified charitable distributions, 1031 exchanges, step-in basis planning for their estates, loans and, when it comes to selling a business, proactively allocating for goodwill vs equipment/materials which will produce better and worse tax treatment.”
Each of the five experts recommended speaking with an advisor or a tax professional to gain a full understanding of the below strategies and questions facing self-employed clients.
Scroll down the slideshow to see two dozen tax tips for self-employed clients, their financial advisors and their tax professionals. For a breakdown of the key tax-related questions relating to paying off student loans, click here. To find analysis of potential shifts in the required minimum distribution rules of inherited individual retirement accounts, follow this link.
