How to Avoid a Huge Tax Bill When You are Self-Employed

Now that you own your own business, you are responsible for your taxes. One of the fears that I hear about the most is having to pay a huge tax bill when filing your taxes as self-employed at the end of the year. 

This is a fear that holds business owners back from really making an income in their business. 

Well, think about it this way. The taxes that you pay in your business being self-employed are the same taxes that you pay when you receive a paycheck from a job, but your employer also pays half of your social security and medicare for you. When you own your own business, you are responsible for both the employee and employer portions of the taxes due, as well as tax on your income. 

You just have no one else to pay this or deduct it from your paycheck every week for you. 

But there are things that you can start to do right now that help you avoid having to pay a huge tax bill on Tax Day just because you are self-employed.

Best Tips to Help You Reduce Your Tax Bill While Being Self-Employed

Save Your Income for Taxes

I always recommend to my clients to save 20-30% of their income for taxes. Transfer this money directly to a savings account that can hold this money for you. 

When you transfer it to a savings account, you are earning some interest on it as well. Why not make your money work for you? 

By having this money in a savings account for your taxes, it takes a lot of the stress out of having to pay taxes because the money is already earmarked for tax purposes. 

Most people don't like the fact that they have to pay so much in taxes, but it's part of being a business owner, or even someone who works. You have to pay taxes. 

It is actually the law!

When you are receiving a regular paycheck from your employer, you don't see this money first, it is taken from your paycheck before you see it.

But as a business owner, you see the money first and then have to pay it in taxes after you receive it. And for many, this is a hard concept to grasp. But it's a part of being a business owner.


Side note: If you also collect and remit sales tax, this does not count in your 20-30% to save. Sales tax is a completely different tax than income tax. For sales tax, you are just an agent of your state (or taxing bureau) to collect sales tax for them. Get this guide to sales tax for online business to look into this further. 

Pay Estimated Taxes

Did you know that if you pay estimated taxes every quarter and you end up overpaying, you'll actually get a refund when you file your tax return? 

I'm not suggesting that you purposely overpay on your estimated taxes. I'm just giving you some food for thought here. 

Plus, normally when you calculate your estimated payments, you are only using your revenue, or the money you brought into your business this year. 

When you file your tax return, you get to deduct your business expenses from your revenue and use your net income as your base for what you owe taxes on for the year. 

Estimated taxes are paid quarterly. You will pay these to the federal government, your state and your local government. 

The due dates are as follows:

First Quarter - January 1 - March 31 - Due April 15

Second Quarter - April 1 - June 30 - Due July 15

Third Quarter - July 1 - September 30 - Due October 15

Fourth Quarter - October 1 - December 31 - Due January 15

The federal government will also charge you penalties for not paying your estimated taxes every quarter as well on your return. State and local governments may also do this, but it depends on your state. 

When you pay estimated taxes each quarter, you are saving on the possible penalties that you could be charged on your annual tax return, plus you are reducing the amount that is due on your annual tax return. 

Finally take your taxes from frustration, chaos and confusion to calm and organized.

Learn everything you need to know to  master your business finances and taxes explained in plain English. 

Keep Up with Your Business Bookkeeping

When you keep up with your business bookkeeping and avoid making these bookkeeping mistakes many business owners make, you'll make it even easier on yourself to prepare and file your tax returns. Or to give all of your data to a tax professional to file your return for you. 

When your bookkeeping is not done regularly, not only do you not know what your actual financial situation is in your business, but it ends up taking much longer in the end to get your bookkeeping up to date. 

This will also allow you to maximize your business expenses to only pay taxes on your net income, not your revenue. 

Not only do you want to keep up with your bookkeeping, but you want to make sure you keep accurate records as well. The better your records, the easier it is to keep track of everything for your business. 

There are many different software programs out there that are available to you to help you with your bookkeeping: Quickbooks, Freshbooks and Xero are among the popular ones. There are some other ones out there, but as an accountant and bookkeeper, I personally don't really recommend others. You want a program that is going to be easy to learn and does the job exactly as you want it to. 

Change Your Mindset About Paying Taxes

Paying taxes is the one thing that I see complained about the most when it comes to owning your own business. 

There is a famous quote from Benjamin Franklin, 

"In this world, nothing is said to be certain, except death and taxes." 

You are always going to have to pay taxes on your net income in your business. 

So the only thing left for you to do, is to accept that you have to pay taxes on your income. 

When you change your mindset about paying taxes, you realize how much money you have actually made in your business. 

Having to pay taxes in your business means you actually made money this year. And that's a good thing. 

Plus when you are actually setting aside 20-30% of your income when you receive it for tax purposes, it is much easier to realize that your taxes are already accounted for. 

Taxes are a part of doing business. If you really think you shouldn't have to pay taxes, then you shouldn't have your own business.

Look into Investing Your Money

When you work for someone else, you usually have options to join the company retirement fund or IRA or maybe even an HSA. 

As a self-employed business owner, you now have to find these options for yourself. And some of these retirement options for your business can be deductible on your tax return. 

You will need to talk to a financial planner for more information on the retirement and investment accounts and to a local accountant for direction on how to handle these based on your state. Not everything is handled the same way and I am not a financial planner. 

There are options for investments in your retirement as a self-employed person. And these options help to lower your taxable income, which in turn reduce your tax bill on your tax return.


The only thing to keep in mind with investing your money is that there are limits on how much you can invest in a tax year. Make sure you check with the IRS limits for this tax year as well. Your financial planner should also be able to assist you to stay within these limits. 

You can prevent a huge tax bill when you are self-employed. But you also need to accept that you need to pay taxes as well. When you prepare for them ahead of time, save your income and pay estimated taxes, you are saving yourself a lot of the headache and stress attached to paying taxes as a business owner. 

Part of being a business owner is having to pay taxes. It's a fact of life. You are not going to get out paying taxes just because you no longer work for an employer that pays them for you. 

Tell me, what stresses you out the most about having to pay taxes for your business?

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