It's safe to say that most freelancers live in a constant state of dread and anxiety as we wait for pitches to be accepted, contracts to be approved, and checks to arrive in the mail. This time of year, however, can cause the most anxiety as federal tax returns can take away not only the joy in what we do, but much of our income from it.
Here are a few things you need to know to make tax season a little less painful.
While it might be tempting to save money by preparing your own taxes, things are a little more complicated for freelancers. According to Lauren Borden, a bookkeeper from Southampton, Pennsylvania, "Most of the tax-law changes will not affect freelancers this year, much like most of the public. However, some things are still the same: Just like a tax preparer wouldn’t do freelancing, I wouldn’t recommend a freelancer do his or her own taxes."
She explains, "A freelancer (taxpayer) will be asked to provide basic financial records such as bank/credit card statements and any 1099-MISC forms to substantiate the reported activity. Good record keeping and early start to the tax preparation will be very important to make the filing process easy and surprise-free."
And even if it's your first year as a freelancer, don't be surprised if you owe money. Snowe Saxman, an accountant from Lake Mary, Florida, says, "If you make a profit, you are responsible for paying self-employment taxes; 90% of freelancers are not aware this exists. In the beginning of business, many do not profit, so it doesn't matter. However, the first year they do, they are hit with a much larger tax liability they did not plan for."
Borden notes that when preparing your taxes, there are some easy deductions every freelancer can and should take—yet often forget. These include:
- Office supplies
- Cabs, subways, buses
- Books, magazines, reference material
- Office rent
- Gas and electric
- Memberships to professional organizations
- Messengers, private mail carriers, postage
- Business insurance
- Tax preparation
- Business meals and entertainment
- Mortgage interest/taxes
- Legal and professional fees
She also notes that The Freelancers Union has a truly ultimate guide to deductions that freelancers should explore to ensure they're not missing any expenses that could be accounted for on their 2015 return. This list includes expenses that many freelancers may not know could be deducted, so it's worth a look.
Borden also explains that these expenses must have been incurred by December 31, 2015, but she says, "A taxpayer may be able to maximize the deductions in the current or future year by "timing" the expense by either spending as much as possible to offset a substantial amount of income in the current year, or to defer the expenses if the current year wasn’t as busy."
Saxman adds, "The only thing you can do now is invest in retirement plans before April 15 to save." Using this strategy, you can contribute up to $5,500 for the 2015 tax year until April 15, 2016, and save over $1,000 on your 2015 taxes.
As a freelancer, my time is valuable—and I also know what I'm good at. One of those things is definitely not managing money, which is why I've always used a bookkeeper for my taxes. Borden says, "There is definitely a substantial advantage to hiring a qualified preparer. An experienced tax preparer will ensure to legally maximize the tax benefits by asking the right questions about the taxpayer and the business."
She adds, "In many cases, the tax preparer will uncover some of the issues (good or bad) in the previously filed returns and will propose amending prior-year returns. In addition, a pre-year-end meeting with a tax preparer may be needed to estimate the current year projected tax liability to consider acceleration of any of the year-end deductions."
Saxman echoes this, noting, "The IRS estimated that we overpay our taxes by $945 billion, mostly because people file their taxes themselves and don't utilize strategic tax planning. Most tax preparers don't utilize money-saving strategies. Working with them can save you some, but working with an expert tax strategist can save thousands every year. Our average client saves over $4,000 per year."
Borden also notes that one of the most common mistakes freelancers make when filing their taxes is "very simple—not hiring a tax preparer." Not only can this increase the amount of your tax liability, but also your chances of being audited.
And if you thought the increased state of dread and panic from your taxes is too much to handle once a year, you definitely don't want to get audited. The daily anxiety of freelancing is already enough to handle.