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.
It happens every year around this time: The frantic phone calls start coming in to our office from freelancers who have just realized it’s almost April 15. They haven’t gotten their income and expense records together, they haven’t met with an accountant, and most of them don’t know whether they will owe money for tax year 2012 or get a refund.
Do you fall into this category? If so, all is not lost. There are still a number of things you can do to triage the fast-approaching tax filing deadline, and you can use this opportunity to get your act together for next year.
Here are some do’s and don’ts we pass along to freelancers who find themselves in this situation:
Do: Get organized immediately. That means gathering up the 1099 tax forms you should have received in the past couple of months from clients who paid you more than $600 in 2012. It also means pulling together any W-2 forms that you or your spouse received from full- or part-time employment last year; your bank and mortgage interest statements; investment records; and business expense receipts.
Don’t: Bury your head in the sand. If you don’t file your federal and state returns by April 15, you will be in line for hefty IRS fines and penalties that accumulate over time. Dealing with taxes is one of the downsides of being a freelancer, but it’s not worth putting off the pain – it will only get worse the longer you delay.
Do: Take a look at last year’s tax returns. Compare what you made in 2012 with the freelance income reported on your 2011 returns, and estimate whether your business expenses were similar for both years. From that information, you should be able to estimate whether you’ll owe taxes or be in line for a refund.
Do: Consider filing an extension. The IRS grants extensions for late tax filers from April 15 to Sept. 15. If you file the paperwork requesting an extension by April 15, that will mitigate the penalties you’ll face for not filing in a timely manner.
Don’t: Expect to get off the hook completely. If you owe taxes for 2012, you will have to estimate how much and pay that amount by April 15, even if you get an extension on filing your actual returns. If you owe a large sum of money, pay as much as you can and request a payment plan for the remainder. You’ll have to pay some interest and penalties on the outstanding balance, but paying something by April 15 will mitigate the damage.
Do: Claim deductions for which you qualify. As a freelancer, you can deduct expenses that the IRS terms “ordinary and necessary” to run your business. That means home office, if you work exclusively from home, and vehicle expenses, if you use your car to get to business meetings, interviews, and events. Don't forget things like office expenses, Internet and mobile phone charges, and equipment you buy (like computers and furniture) for your business. Gather the receipts that support those deductions and figure out how much you spent on them in 2012.
Don’t: Wind up in this position next year. Put a game plan in place so you don’t scramble again on your 2013 taxes. That means signing up for accounting software like Quicken, Mint, Outright, or Quickbooks, and using it to track your income and expenses this year. It will take much of the pain and guesswork out of tax time next year.
Do: Get help. Talk to an accounting professional and get some guidance on your 2012 returns, as well as advice on what you should be doing differently in future. That may include paying quarterly estimated taxes, if your freelance income requires that, and estimating how much you’ll owe next year so you’ll be mentally and financially prepared.