So, you're a professional salesperson, and you closed a boatload of business last year. Hate to brag, but you slayed it. Congrats!
Now it's time to calculate and pay your taxes. NOT congrats on that because it's likely to be brutal. Yes paying a lot of taxes is a sign of success but it's also important that you stay aware of the tax strategies you can employ to keep the brutality at least somewhat under control.
Here are five tax tips for sales pros that can save you money on your taxes.
1. Hunt Through Your Personal Expenses for Business Expenses
Successful salespeople keep their business on their mind approximately 24/7/365. We consider everyone a prospect, including friends and family. We constantly discuss business with our spouses, significant others, and even our children.
Before prepping this year's taxes, take a look through your personal bank and credit card statements and see if you can find any business-related expenses. Major possibilities here include subscriptions such as Amazon Prime, your home cable and internet bill if you work at the house (who doesn't?), and meals & entertainment with your spouse or signficant other where business was discussed.
Remember that you can use a "business use percentage" allocation if something is partly business and partly personal.
Remember too that you can have someone else who's not as busy as you are perform this tedious task for you.
2. Optimize Your Home Office Deduction
The IRS provides a deduction for your home office based upon the square footage of the office in relation to the entire living space. So for instance, if your home office is 200 square feet and your house is 1,000 square feet, you'll pick up a deduction of 20% of all your housing costs including utilities and repairs.
Keep in mind that, while the office does not need to be a separate room entirely, it must be a separate area that is used "regularly and exclusively" for business.
If you're on 1099 (self-employed), it's pretty easy to justify home office. If you're an employee on W-2, your home office must be "for the convenience of your employer," and for this reason many employees don't claim the deduction. But let's face it, today's employers demand 24/7 responsiveness and if you are dealing with customers and coworkers from home, get your home office deduction in place like yesterday.
A few other 'tricks' with the home office: if repairs are done specifically to home office part of home, claim 100%, not just the regular business use percentage; don't forget to account for storage used for business-related stuff, closer salespeople usually have loads of books, training materials, and other paperwork taking up space somewhere in our home; and, if you've been using a home office from past years, make sure you or your tax pro "picks up" any home office carryover deductions from prior years where maybe you were not making the kind of money you made this year and perhaps did not fully use your home office deduction from that year.
3. Recognize Income and Expenses in the Best Way for You
Anyone who runs a business—and if you're on 1099, you're running a business—has the right to use either the "accrual method" or the "cash method" of accounting. Without getting too deep into accounting jargon, these two methods govern the timing of when you "recognize" your income and your expenses. And by timing I mean "when you put it on your tax return."
And by "when you put it on your tax return," I mean "when you pay tax on it." If you had a huge year last year, but not sure what your sales will be this year, or vice versa, take the time to think through when you are recognizing income and expenses. If you got a huge check right at the end of last year, for instance, but still had to perform service to earn that check this year, then by the accrual method of accounting that check is unearned income which is a liability and not revenue until you do the work that earns that money.
This strategy is not for the DIYers, and you have to use a consistent method from year to year, but if this one applies to you it can save you buku bucks.
4. Consider a Contribution to a Health Savings Account (HSA)
Many salespeople who work on 1099 (no taxes out of your paychecks) pay our own health insurance and opt for the lowest cost health insurance we can find. This means that we often have large deductibles and end up paying out-of-pocket for our health care services. A Health Savings Account (HSA) gives you a way to get a tax deduction for your out-of-pocket medical costs.
The account functions much like an IRA, where you take a deduction for your contribution, and then you can withdraw the money for medical expenses; the HSA company gives you a kind of "debit card" that you use for co-pays, etc. Only certain health insurance plans qualify so you have to check and see if yours does. But if it does, the nice thing is you can "backdate" your contribution to last year, and score an extra deduction on your tax return.
For tax year 2015, you can contribute up to $3,350 for yourself or $6,650 for your family. If you're in the 28% federal tax bracket or higher, which if you're a True Hardcore Closer you probably are, socking away $3,350 into an HSA saves you $938—not including any state income tax deduction, which may increase your savings. Also, the HSA grows tax-free, which is always a nice feature.
5. Annualize Your Income to Avoid or Reduce Underpayment of Tax Penalty
The temptation for us self-employed folks is always to wait until the end of the year to pay all our taxes. The IRS requires "pay as you go" for self-employed people just like those who are on W-2. Fact is though, even though 1099ers may know we're "supposed to" make quarterly payments ahead of time, most of us don’t do it or do it one or two quarters but not all of them.
Depending on your situation, not paying your estimated taxes can add an extra 5% to your tax bill, via the Underpayment of Estimated Tax Penalty. If you earned a large portion of your income in the last couple quarters of the year, however, you may qualify to "annualize" your income and reduce or get rid of some of that penalty.
Again, not a strategy for the DIYer, but worth mentioning to your tax pro if you do see that pesky penalty adding insult to injury on your taxes this year.
BONUS ALERT: But Wait, There's More!
We said 5 but we're giving you a bonus: don't forget to write off credit card interest related to business purchases. This is one of the most-often overlooked deductions. If you carry balances on credit cards, and those balances are in any way related to business purchases, deduct the portion of the interest that is related to business purchases.
We hope one or more of these tax tips for salespeople save you money this year and, possibly, for many years to come. Salespeople work so hard for our living and that's why we need to take care to keep as much of our money as we can. Nothing against Uncle Sam but like Snoop said, "You gotta get yours, but I gotta get mine."
Oh, one thing too, make sure you speak with a competent tax professional before employing these strategies. This is a blog and while all these techniques are ethical and legit in the right hands, if you go and use them wrong and get audited, we take absolutely zero responsibility. If you're a Real Closer you already know that you gotta take responsibility for your own stuff but just to make that clear in case anyone who is a cotton-headed ninny muggins is reading this post.
Anyhow, that's what we have for you, wishing you all the best as you file this year's tax return and if you need professional advice don't hesitate to contact us.