If you’re self-employed, it’s common to struggle with finances, especially when quarterly taxes come due. Maybe you look at your bank account and wonder where that money is going to come from. You might even consider seeking a loan or borrowing money from friends or family. But what if you could reduce your financial difficulties by doing good works?
Donating directly to charity or even offering pro bono services are good ways for financially strapped individuals to both reduce their tax burden and give back to their community. If you’re considering this course of action, here’s what you need to know.
Know The Tax Schedule
Self-employment taxes are typically paid quarterly, based on estimated income. This can make it harder to balance your charitable deductions, but there are ways to make it work. Try to get a sense of your financial outlook and how much you need to reduce your tax burden by. Then, if you’re having a good quarter, donate a larger portion at that time.
Many self-employed individuals find it harder to afford their quarterly taxes later in the year, so try to make larger donations during the first half of the year. This will reduce your year-long tax burden while taking advantage of your current financial balance.
Keep Good Records
Any time you plan to make a deduction on your taxes, you need to keep good records of your donations – both monetary and service- based. If you make a donation, keep the receipts on file, and if you do pro bono work, creating an invoice for the service. You should also get evidence from the organization you donate to, noting your contribution or efforts. Depending on what you donate, you may also need to calculate the fair market value of the goods.
A Warning About Advertising
There are many different types of deductions, and charitable and business deductions are handled differently under the tax code. Typically donations and pro bono work are counted as charitable donations, but if you receive advertising in return for services then the work becomes a business expense. Make sure that you know which category your work falls into so that you don’t misattribute your deductions.
Follow The Rules
There are a number of lesser known rules that apply to charitable donations, so if you plan on giving a significant portion of your income to charity, make sure you know what’s expected. For example, If you donate more than $500 in non-cash materials, you’ll need to fill out Form 8283 to accompany your taxes.
Everyone benefits when we give to charity, so why not transform your tax expectation into community good? Self-employment taxes can be burdensome, but through good works, we can shed some of that weight.