Tax Tips for US Freelance Workers
Are you new to freelancing or self-employment? In recent years, more Americans than ever have responded to a disappointing job market by becoming entrepreneurs, and the IRS has taken notice.
In 2012, the federal government expects to process about 15 million tax returns from self-employed individuals. Whether you hire a tax pro or use software to file taxes online yourself, the following tips can help you meet legal obligations, lower your tax bill and get the biggest refund possible.
1. Save Your Receipts
Many types of receipts are valuable to freelancers – tax deductions can apply to payments for healthcare, business travel, business postage, office supplies and for expenses in many other categories. If you file taxes online, you can actually watch your tax bill fall when you enter data for new receipts.
Every receipt matters, even if it’s just for Post-Its. A colleague frequently tells her clients: “Every dollar on your business receipts is like a grain of rice. These can add up to a great meal.”
You should save receipts in a fireproof area for a few years after paying your taxes, because if you are audited, these tiny scraps of paper can help you avoid a major hassle. Even if you don’t have storage space for old paperwork, make digitized copies.
2. Get Organized to Reduce Stress
Do you lack an organizational system for receipts and other paperwork? Since many freelancers start out as hobbyists or wear many proverbial hats, it’s easy to let certain business records slide. But this casual approach to financial record keeping has some significant risks – you might miss out on valuable deductions, get accused of tax evasion, or at the very least develop a splitting headache getting organized as mid-April approaches!
For this reason it’s easiest as well as important to take small steps to get organized for next year to remove the stress.The simplest thing to do isto get a folder or envelope and label it with today’s month and year. Place any relevant receipts inside, and if it’s unclear what a receipt’s purpose is, write the details directly on the back.
Next, build upon this seedling of an organizational system by doing the following – your future self will thank you:
- After last year’s taxes are filed, develop a well-organized filing cabinet or digital system to store your new receipts. Use this year’s tax prep experience to come up with folder names.
- If you use your car for business, keep a journal in the car for logging business mileage, parking fees, highway tolls and the purpose of each business drive.
- Use financial management software to stay organized year-round. Quicken, a paid program, is probably the most popular option in the US. Free bookkeeping programs are also available on cloud networks.
3. Collecting This Year’s Tax Paperwork
Here is some information you will probably need as a freelancer filing taxes:
- W2s or 1099s,
- Receipts for business start-up costs,
- The square footage of your home and home office,
- Utility bills related to your office,
- Odometer readings for a business vehicle,
- Business vehicle repair and maintenance receipts,
- Travel receipts,
- Business meal receipts,
- Receipts for business supplies,
- Gross sales total,
- Total funds refunded to customers,
- Total you spent on business postage,
- Total credit card processing fees,
- A receipt for last year’s tax prep expenses.
This list isn’t necessarily exhaustive. For example, just like other taxpayers, you might need paperwork for generation-skipping taxes or reporting capital gains. If other paperwork is needed you’ll be prompted by your computer program or tax agent.
4. Use Tax Prep Software or Hire a Pro
As the above section suggests, freelance workers can have complicated annual tax returns. You probably shouldn’t attempt to file your taxes without human help or computerized guidance, as it’s very easy for people of any intelligence level to make costly mistakes.
In most cases, computerized guidance will more than suffice. These are a few reasons why:
- Tax software is programmed to efficiently determine which IRS forms you need to complete.
- The best software will ensure that you get all deductions that you’re eligible for.
- Unlike an accountant, a computerized tax prep program can be put on hold for hours when you’re looking for a receipt in your glove box or just want a break.
- Many online tax prep programs offer live support from tax professionals via phone or instant messaging.
Sometimes though, it’s best to hire a tax pro to do all of the work since time is valuable. It’s also a good route to take if your situation is complex.
In any case, file taxes online if possible. Electronic filing brings faster income tax returns via a direct credit, a prepaid Visa or a paper check.
5. Contribute to an IRA
If you’ve calculated your tax burden and are displeased, remember that you might be able to lower your bill by contributing to a retirement fund. You can contribute to a traditional or Roth IRA through the April 17, 2012 tax deadline to claim a deduction for 2011. The annual tax-deductible limit is $5,000 for taxpayers under age 50 and $6,000 for taxpayers 50 and over.
6. Make Estimated Payments
After paying taxes for 2011, you might find that you need to pay quarterly taxes, in fact this is unavoidably one of your legal responsibilities if you expect to owe $1000 or more for the tax year. Think of these taxes in the same way as an employer would withhold a tax amount from your paychecks. Some people actually prefer paying four small bills instead of one large “surprise” bill in the spring.
Self-employed workers who do not pay estimated taxes by quarterly due dates could be charged penalties. These penalties can apply even if you’re due a refund. The IRS will likely apply this penalty more widely in the near future – since many freelancers accept electronic payments, they’ve caught the Uncle Sam’s attention.
You can make estimated quarterly payments using a single tax form titled ‘Form 1040-ES, Estimated Tax for Individuals’.
Conclusion
Freelancers can take a few important steps to make paying their annual taxes less stressful and time-consuming. These steps include staying organized throughout the year, making quarterly estimated tax payments, and working with an accountant or using good tax prep software to file taxes online. Following these tax tips can help you avoid a big April tax bill and help you to get all of your tax deductions.
About the Author:Bob Goren is an independent advisor helping clients file taxes online in the US.
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