2016-04-01-CREA-270-Pitfall-KM

tispr tips

Tax Time: 14 Common Freelancer Pitfalls to Avoid

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You’re not alone if you tend to use your “gut instincts” to guide you on filing your taxes, especially if you’re up against the April 15 deadline. The good news is, you’ve found us, and are going to help you avoid the common misconceptions many freelancers make (and your gut instincts can focus on more important decisions, like where to eat for dinner tonight.)

14 Common Freelancer Pitfalls to Avoid this Tax Season

 A. Declaring Your Taxes

  1. I didn’t make enough money to have to pay taxes. Even if you weren’t exactly a worker bee this year, the reward for the labor you did put in is getting to pay self-employment tax any time you make $400 or more! Hooray!
  2. I got paid in cash so am scott-free! There’s no such thing as “under the table” – the government’s eyes see above and below all wooden surfaces (glass ones too). It’s our responsibility as US citizens to track and report every dollar we make, even if it’s not accounted for by a 1099 misc.
  3. I haven’t been paying estimated taxes, but I’ll wait till my return’s due to worry about what I owe. When Scarlett O’Hara boldly declared “I’ll think about that tomorrow, tomorrow is another day,” let’s hope she wasn’t referring to her taxes, too! If you’re a freelancer and not paying estimated taxes throughout the year, experts highly recommend you set aside at least 30% of your income to have ready for payment come tax time.
  4. I filed an extension so don’t have to pay anything for 6 months. Kinda takes the wind outta your sails, but filing an extension does NOT mean you have until October 15th to pay. No smooth sailing here – the extension gives you more time to fill out your tax return, but the money you owe is still due by April 18th! Send in an estimated payment based on your W-2s or you’ll be charged.
  5. My lackadaisical record keeping’s good enough, who really gets audited anyways? “It’ll never happen to me!” We’ve all thought this…whether with speeding tickets, identity theft, injuries, breakups, and yes, audits. Well when you get that Dear John letter from the IRS saying your love story’s over and all your income/expenses are about to be gone over with a fine tooth comb, how great would it feel to pump that breakup playlist and know your pristine record keeping will save the day?! Keep track of the receipts from EVERY deduction you claim, and be ready to prove they are all business-related.
  6. My gross income’s all mine to spend, right? Yes, it is gross, but to come up with an accurate assessment of what you’re actually making you can’t think and spend like your gross income is the same thing as your personal income. You have to deduct all your business expenses first to land on the number that’s actually yours to pocket!

B. Filing Out Your Tax Return

  1. I paid estimated taxes all year so don’t have to file a return. You’ve done it all right – you paid estimated taxes the 4 times you were supposed to over the year so are exempt from having to file a return, right? Wrong! We’ll give ya a gold star (and we don’t hand those out to just anyone), but you still have to file a standard tax return on time.
  2. The names I put down for myself & my family on my return don’t matter. Even if your top baby name was Lindey and your wife won with Lindsey (no I’m not speaking from personal experience…also, thanks Mom…) this is NOT the time to play around with re-naming children or spouses! All names must match those on your respective social security cards or those lovely exemptions you get to claim go bye bye!
  3. The only income I’m responsible for is from the 1099s I receive. If you don’t declare ALL the money you receive and only rely on your 1099s, you won’t know whether or not they’re accurate or if you missed one. In both cases you’ll get a lovely letter stating you owe additional money PLUS penalties and interest!
  4. I’m only going to write down on my Schedule C the income I billed out. I may sound like a broken record here, but when you file your Schedule C you don’t get to put as your income only what you billed out…ANY money you’ve received whether cash, coin, silver dollars, ha-pennies, wooden bills or gold gets reported on that dotted line.
  5. I can ignore reimbursed expenses – they don’t really count. So you were a good samaritan and offered to pick up materials for a work event that you later expensed to the company…well Uncle Sam expects you to do your due diligence and include these reimbursed expenses as income, while also deducting them appropriately on your Schedule C.
  6. My bank statements are enough to show proof of purchase. You may’ve gone to Home Depot to purchase lumber to build your new desk (who you think ya are, Paul Bunyan?!) but if you also came home with a bundle of flowers for the garden that bank statement suddenly doesn’t hold so much weight, right? You MUST keep track of itemized receipts to expressly prove what’s for business and what’s for pleasure!

C. My Business

  1. I incorporated my business since I legally have to. “Incorporated” just sounds sexy, but do you really need to go through the hassle of the rigorous accounting systems, filing of separate forms, added expense and headache? Make sure you’ve investigated what form your business should take…Hey! How bout referencing tispr’s handy dandy cheat sheet to decide which entity is best for you?!
  2. I can send a bill & collect from anyone who owes me money at any time. You mean the 5 bucks I lent Sarah for fro-yo in college is gone for good?! Even if you’re rightfully owed, the longer you put off billing someone the chances go up you may not even be able to collect at all (just hold a sit-in on their front porch until they fold…always worked for me!) 😉
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