Thousands of courses for $10 728x90

الخميس، 16 فبراير 2017

Three Tax Traps for Freelancers (and Three Perks, Too)

There are many benefits to freelancing, but it’s sometimes hard to remember that when tax time rolls around. That’s because, unlike regular employees who pay taxes through deductions from their paychecks, freelancers are responsible for setting aside their own state, local, and federal taxes. They also have to pay self-employment tax to contribute to Social Security and Medicare.

This can add up to a nasty surprise at tax time. But it doesn’t have to. With a little planning, you can stay on top of things and avoid getting a big bill. Your accountant or tax professional is the person to see about creating a concrete plan, but being aware of some of the pitfalls can help you prepare and know what to expect.

Plus, as we’ll see in a minute, it’s not all bad news – freelancers can get some unique tax advantages as well. Planning ahead can help you keep more of your money, as well as make sure you’re paid up in timely fashion.

Three Tax Traps for Freelancers

Tax Trap #1: Not Paying Enough Estimated Taxes

The IRS wants self-employed individuals to pay estimated taxes on a quarterly basis. As an accountant once explained it to me, “Think of your total tax bill for the year as a bucket. By the end of the year, the IRS wants to see that bucket full to the top.”

Paying on a quarterly basis helps you fill up the bucket. Of course, if you don’t pour enough into the bucket each quarter, you’ll come up short, and be subject to penalties. (Which is where the metaphor kind of falls apart.)

The IRS provides instructions for figuring out estimated tax for quarterly payments. Just keep in mind that your income is likely to fluctuate over the course of the year. If you get a big client or raise your rates, you’ll want to up your payments accordingly.

Tax Trap #2: Fudging the Home Office Deduction

There are all sorts of myths about what qualifies as a home office. One friend will tell you that it absolutely has to have a door; another will swear that you can write off your dining room because you use the table as an occasional workspace. Both of those friends are wrong.

The IRS is pretty clear on what counts as a home office for tax purposes. For freelancers, the important tests are:

Regular and Exclusive Use: This means that the workspace is used regularly for business, and exclusively for that business. Most tax professionals will remind you not to use your home office for anything other than work. That means no storing skis in there, no using your home office as a study for kids doing homework, and no tucking a desk into the corner of the living room and claiming the whole space for work.

Principal Place of Your Business: Generally, you’ll have to show that you use your home office as your principal place of business. You might also qualify if you do business outside the home, but use part of your home regularly and exclusively for business.

More details on the home office deduction can be found here.

Tax Trap #3: Skipping Deductions, Just to Be Safe

For every freelancer who tries to write off their personal electronics as business deductions, there’s another who overpays their taxes because they don’t want to risk taking perfectly valid write-offs. This feels virtuous, but in fact, you’re just leaving money on the table. Freelancer’s Union has a list of freelancer tax deductions, including office supplies and web hosting fees, that are worth checking out.

Don’t take deductions you aren’t entitled to, but don’t be afraid to claim legitimate deductions. Even if you’re a creative type, by choosing the freelance life, you’ve decided to become a businessperson as well. Don’t cheat yourself.

Three Tax Perks for Freelancers

Now, the bright side: Here are some tax benefits available to freelancers:

Tax Perk #1: Some Existing Bills May Be Deductible

If your home office (the one you use exclusively for work, and for no other reason) is located in your house, you’ll probably be able to write off a percentage of your utilities. Depending on what you do for work, you might be able to do the same with your cellphone, cable, internet, or other services.

Again, your tax professional will be able to tell you what’s fair game. But if you’ve left the rat race to work for yourself at something you love, you’ll likely discover that some of your expenses (or at least a percentage of them) are now totally valid deductions.

Tax Perk #2: Professional Development

To keep on top of your game professionally, you have to keep learning. The IRS knows this, which is why educational expenses are generally deductible.

Again, be reasonable: If you’re a graphic designer, those salsa dancing lessons aren’t exactly related to your area of expertise. But classes that develop your skills and boost your earnings probably are.

Tax Perk #3: Deductible Fun

Fifty percent of the cost of business meals are tax-deductible, according to IRS rules, which means that if you take a client out to dinner, you can write off half the check. Just make sure you keep good records. The IRS specifies that you must record the date, place, and business relationship related to the expense.

Obligatory Legal Disclaimer: While every effort has been made to provide accurate information, we’re not accountants or tax preparers. Discuss all tax planning with a professional. 

Related Articles:

The post Three Tax Traps for Freelancers (and Three Perks, Too) appeared first on The Simple Dollar.



Source The Simple Dollar http://ift.tt/2lUUoXc

ليست هناك تعليقات:

إرسال تعليق