Almost anyone can benefit from taking a quick look at their tax liability before year-end, but if you’re self-employed, it’s imperative. Small business and self-employment income often swing far more widely than a typical salary. As a result, there’s a decent chance that you will pay too much or too little to U.S. tax authorities, which could result in surprises – and possibly penalties – next year.

Worse, because the tax law was drastically revamped in 2018, you can’t be sure that you’ve paid the right amount even if your income is relatively close to what it was last year.

“Without a crystal ball, this year is going to be a real challenge,” says David Du Val, chief customer advocacy officer for TaxAudit, a company that represents taxpayers who are being audited.

That said, self-employed people can do a lot to improve their tax situations before year-end.

Gather records

Start by gathering information about how much you earned this year and how much tax you have already paid either through withholding or estimated payments, Du Val suggests. Also get a copy of last year’s tax return to compare your income and tax obligation from 2017.

If you have already paid estimated taxes amounting to at least 110% of last year’s tax obligation, you will not be subject to underpayment penalties. (These penalties generally amount to interest on the amount that was underpaid.)

What if your tax payments fall short of this “safe harbor” and you’re pretty sure you’re going to owe a lot more? If, like many side hustlers, you have a job in addition to your self-employment income, ask your employer to boost your withholding. You don’t have to change your exemption amounts to do this. You can simply specify a set amount that should be deducted from each of your remaining checks this year. Your human resource department should be able to guide you on the specifics.

Boosting W-2 withholding is the best option when it’s available because the IRS acts as if your withholding payments came in equal installments throughout the year — even when they didn’t. You don’t get the same treatment when you make quarterly estimated payments. So,  even if you made a big estimated payment now to make up for an earlier shortfall, the IRS could hit you with an underpayment penalty. There are ways to fight the penalty, but they’re time consuming and don’t always work.

Troll for business deductions

What you can do instead is look for ways to reduce your tax obligation. Self-employed people have lots of ways to do that.

Indeed, although the new tax law eliminated or limited many itemized deductions for wage-earners, it actually created new deductions for small businesses and the self-employed. But you may need to reconsider some tax strategies.

For instance, if you operate your side hustle from a home office, but you’ve never before claimed the home office deduction, you might want to claim it now. Why? The new law limits deductions for some home mortgage interest, as well as for property tax expenses for individuals. However, small business owners can claim some of those otherwise disallowed deductions, as long as they’re legitimate costs of operating your office.

“If you have a dedicated office space in your home, you may want to declare it as a home office,” says Mark Luscombe, principal tax analyst with Wolters Kluwer. “That could allow you to move some of your property tax expenses to your business return. That’s gravy that would otherwise be lost.”

Put the kids to work

Another little-known tax break for business owners is that they can employ their kids, who are under the age of 18, without having to pay employment taxes on their wages. This shifts some of income out of your high tax bracket into your child’s likely zero-tax bracket. Indeed, the child may be able to contribute the entire amount that you pay him or her to a tax-favored retirement account, such as an IRA.

Of course, the child actually needs to do something of value to earn the pay. And it’s too late to move significant income if all your child can do is take out the office waste baskets. However, if he or she can design your website, handle your social media marketing or model for your company brochures, those are jobs you’d pay a lot for elsewhere. And many of these skills are in a typical teen or tween’s wheelhouse.

Expensing

Also know that if you buy products for your business, you can expense those products generally in the year that they were purchased. Let’s say, for example, that you bought your newly-hired offspring a smart phone so he/she could handle your company’s social media needs on the go. That’s arguably a deductible expense for your business. So is interest on a business loan, work-related travel, business meals, office furniture and supplies. Just be sure to keep good records of what you bought and why you bought it. 

New “pass-through” deduction

There’s also a new deduction specifically for self-employed individuals and small businesses that qualify as so-called “pass-through” entities. These are generally sole proprietorships, Subchapter S Corporations and LLCs.

In a nutshell, this new law allows you to 20% off the top of your business income — after deducting business expenses from business revenues, as usual. Naturally, that could cut your tax bill dramatically.

However, if you earn more than $157,500 when single or $315,000 when married and filing a joint return, the passthrough deduction gets complicated. If you’re fortunate enough to be in this income category, hire an accountant. Determining who qualifies to take this lucrative break is muddy enough that the IRS is still “clarifying” the law.

Related

You may also want to read our primer on taxes when you’re self-employed and the down-and-dirty on the new passthrough deduction.