Wednesday, 23 July 2014
Cheyney Group Accounting: Freelancers, Here's How To Do Your Taxes
This is the second in a series of articles on managing your finances as a freelancer. Read part 1, on budgeting for freelancers, part 3 on how freelancers should save, pay down debt, retire and splurge, and part 4, on ways to protect and structure your business.
The freelancer’s life is to be envied: alarm clock-free, commute-free, business attire-free, it is a series of days of answering to no one but your own whims, punctuated only by afternoon naps, or, when the occasion calls for it, daytime dance breaks.
Freelancers forgo all the drudgery of full-time work in exchange for one concession : We have to do our own taxes. And, it’s not easy.
If you’re a freelancer, and especially if you are new to the game, nothing dampens the high of being your own boss like a massive bill from the Internal Revenue Service .
“I see a lot of people who are so excited, they freelanced their first year, they survived, and then they have a $5,000 tax bill and now they owe back taxes,” says Sophia Bera, a certified financial planner and founder of Gen Y Planning.
Here’s how to enjoy all the perks of the freelance life without having taxes kill your buzz.
1. Work with a tax professional.
Freelancers should always work with an accountant , says Bera. She recommends looking for one who specializes in freelancers or small business owners.
Yes, a good accountant can be expensive. But that investment can also save you money, time and headaches.
Shana Bickel, a Sarasota, Florida-based certified public accountant who focuses on small business owners, tells the story of a client who came to her while being audited after having used TurboTax to file. While redoing his tax return, she saw he had taken a deduction for educational expenses up to $250, which teachers take if they buy supplies for their classroom. But he was a personal trainer. When she asked him what that deduction was, “he said, ‘Yeah, I buy a lot of materials that I educate my clients with. I said, ‘Did you realize you just took the K-12 teachers’ expense?’ And he’s like, ‘No, I just answered the question how TurboTax presented it,’” she says. While it was true that he paid for educational materials out of pocket, “only a CPA would understand what that is — that if you’re not a teacher, this line should be blank,” says Bickel.
This is why she recommends that freelancers not use TurboTax or tax services like H&R Block HRB +0.28%. “People can do it,” she says. “It’s at your own risk, though. If you don’t know and understand tax law and how your tax returns should look, once you’ve put in your information and you’re just taking it as it is without proofing it, you’re signing it, so you’re responsible for what you file.”
Also, a professional, particularly one who specializes in doing taxes for the self-employed, may know ways you can save money on taxes in your profession that software or a commercial preparer may not.
2. Know what you need to pay and how much.
Develop a basic understanding of what taxes you need to pay so you aren’t completely in the dark.
Now that you’re independent, you are responsible for your self-employment tax, which consists of your Social Security and Medicare taxes, and for 2013 and 2014 is 7.65%. At a full-time job, that would have been automatically deducted from your paycheck. But now that you are also your own employer, you also have to pay the share your employer was paying, which is an additional 7.65%, for a total of 15.3%. (The silver lining: you can deduct the employer portion.)
Read more HERE