As the dreaded tax season looms, we are all forced to gather our numbers and figure out our situation. Freelancers have a bit more to think about, as your expenses (a.k.a “write-offs) are directly correlated to your tax liability. I will dip into my almost decade of experience in tax accounting in hopes of shedding some light on your business needs. I’ve gathered some tax tips below to help you prepare for the impending conversation with your tax preparer.
1) How To Get Organized
The first of my tax tips is to get organized. Payment and invoicing tools not only contribute to the ease of your operation, but they also provide your business with a digital footprint of your revenue and expenses. This will come in handy come tax time. Here are some suggestions for your consideration:
Due’s Invoicing & Payment functions help provide credit and debit card solutions for your business. In addition, they provide online invoice and digital wallet solutions for freelancers, small business owners, and companies of all sizes.
These types of tools can be of great help in staying away from common business problems, such as low cash flow. The faster you collect, the more flexibility you have as an entrepreneur.
If you are looking to outsource your accounting function, Bench bookkeeping may be for you. As noted on their website:
“It’s easy to get your financial data into Bench. You can connect your business bank and credit card accounts directly, give your bookkeeping team third party access to grab your statements, or simply drag and drop them into your account”
Their chat functions and cloud-based access provide a new age edge to the old-school accounting industry.
These Fintech solutions have the potential to take your business to the next level. They’ll give you the time to focus on promoting your business rather than maintaining the back end.
2) Estimated Payments
Any experienced freelancer and accountant will tell you that you’ll need to consider making estimated payments, especially if freelancing is your sole income. The law behind this requirement is quite simple. Taxpayers, on the Federal level, are required to fund one of the following two bullet points:
- 100% of the prior year’s tax liability OR
- 90% of the current year’s tax liability
Line 44 on your Federal 1040 will be your reference point for these figures.
3) Home Office Deduction
Another one of my tax tips is home office deduction. For those who are self-employed, this is a common question. As an insider of the taxi industry, it’s been rumored this deduction is a hot issue for the Internal Revenue Service. The only way to come to this conclusion is through prior client history, as the IRS does not disclose what they are looking for in their audit scope.
There are a couple of circumstances that need to be present in order for the Home Office Deduction to be properly substantiated:
- Regular and Exclusive Use
- Principal Place of Your Business
In order to avoid any confusion, it’s best to have a separate space in your home for business needs, free of personal items. A separate phone line would be a plus. It’s always smart to do whatever you can to reduce your chance of a tax audit.
4) Travel Costs
Remember to write off any travel expenses directly related to your business. See below for common deductions:
- Uber and car rental expenses
- Hotel costs
5) Still Not Enough?
If you still expect to owe more than you like and have a little extra cash laying around, consider contributing to your HSA or IRA. Contributions to your Individual Retirement Account & Health Savings Accounts will help ease the tax bill as both of these types of accounts are taken on a “Pre-Tax” basis.
Line 25 (Form 1040) – Health Savings Account Deduction
Line 32 (Form 1040) – IRA Deduction
Both contributions will reduce your adjustable gross income on your tax return. In simpler terms, you’ll have less income to be taxed on.
6) Don’t Blame the Messenger
The last of my tax tips is don’t blame the messenger. Remember, don’t blame your accountant for an unfavorable tax bill. It’s just a formula. If you are truly skeptical of their work, get a second opinion.
Ruling out the possibility of having a bad tax preparer, your expenses are your expenses. They should be substantiated by a receipt. Their responsibility is to know what strategies are available to legally avoid tax. There is a large difference between tax avoidance and tax evasion. One will leave money in your pocket and the other will land you in prison.
The best thing to do for yourself is to understand your tax return. That will be the most effective way to know you aren’t getting shafted.
An old tax colleague once told me, “You pay an accountant to be aggressive, not to input numbers.” That being said, an accountant’s flexibility is inherently bound to the information that is provided to them by their clients.