Editor’s Note: Guest blogger Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers across the country. He has a resource section with how-to articles specifically for the self-employed at his website, www.cpaforfreelancers.com.
Ready, set, tax time! If you’re not feeling that enthusiastic about filing your taxes, read this guide from CPA Jonathan Medows. The self-employment specialist lists upcoming deadlines, explains deductions and contributions, and gives advice on how to make the process easier.
Are you looking forward to putting tax season behind you? Get your pencils ready and check out these five helpful tips:
Start Now: The corporate-tax deadline of March 15 applies if you have formed a corporation (whether a “C” or “S” corp) to do business under. The April 15 deadline is the one to aim at for most freelancers who operate as sole proprietors or LLC’s for tax purposes. Whichever the case, get out last year’s return and do some comparisons to 2012 in terms of your income and expenses, estimating whether you will owe money this year or will get a refund. The automatic government spending cuts that became effective on March 1 may slow down the processing time for tax refunds the year, according to the IRS. Getting your 1040 filed early will get you a refund in a more timely fashion.
Get Organized: If you’re not using software such as FreshBooks, QuickBooks, or Quicken, start now for 2013. Meanwhile, pull together your W-2's, 1099's, bank interest statements, investment-account statements, and the business receipts you (hopefully) saved from last year. If you don’t have paper copies, your online bank statements should note your monthly expenditures and allow you to print out copies of checks you wrote for business expenses.
Claim Your Deductions: If you do the majority of your work in a home office that takes up some percentage of the total square footage of your home, you can deduct that percentage, as well as a portion of your home repairs, utilities, and maintenance costs. If you use your car to get to business meetings or interviews, you can claim depreciation as well as deduct gasoline, oil, tolls, and vehicle repairs. Keep a log of the business miles you drive throughout the year. Of course, things like postage stamps, travel expenses, cell phones, and entertaining clients can also be deducted if they are for your business.
Contribute To Your IRA: You can reduce your 2012 tax liability by adding money to a retirement account, such as an IRA or SEP, all the way up until April 15 or when you file your return if you get an extension. There are limits on how much you can contribute depending on your age and income, so ask your accountant or do some research at the user-friendly IRS.gov website. If you want to open a retirement account but won't have the money by April 15, you can file an extension on your tax return and make your retirement contribution when you file by the extension deadline. Just make sure you pay any tax liability you might owe by April 15.
Don’t Go It Alone: Many freelancers try doing their own tax returns, but it’s not usually a good idea. Most errors found by the IRS, which delay refunds and cause unnecessary stress, involve math mistakes on DIY returns. Also, when you’re not sure what deductions to take, you probably need professional advice. Even with the tax software available today, if you’re doing things like taking a home office deduction, itemizing expenses, or traveling for work, your return is going to be more complicated than you may realize. Have an accountant who specializes in small business prepare your return, particularly if 2012 was your first year being self-employed, you bought or sold significant assets, or you hired help. Remember that your tax preparation fee is deductible next year.