If you filed your taxes on time this year, you may be breathing a sigh of relief about not having to think about them again until next April.
Before you wipe any traces of tax-induced sweat off your brow completely though, consider this: Sprinting to the IRS Tax Day finish line on an annual basis is not the best strategy if you want to lower your tax bill and improve the financial state of your business.
Instead, consider adopting a “marathon” mindset when it comes to managing your money and tax obligations. It will not only help you avoid having to race to meet tax deadlines, but also keep your freelance business in tip-top financial shape all year long. Here’s how to do it:
Use this year’s tax return to plan your route. Before you can start your “marathon” financial training plan and put away this year’s tax documents, you need to assess where you stand and what route you need to take to get to where you want to go. Reviewing this year’s tax return and the amount of tax you paid will help you determine if you need to make any adjustments such as those outlined below.
Decide if you need to ramp up or tone down your estimated tax payments. When you’re training for a marathon, balancing workouts and rest helps you avoid burnout and injury while still meeting your goals. The same is true in relation to paying your taxes as a freelance professional. If you wait to pay your taxes only once a year, you’ll not only find yourself in the position of cramping your cash flow by writing a large check to the IRS, but you’ll also be subject to additional interest payments and potential fines. If you had to pay a sizeable amount of tax with your return this year, make larger quarterly estimated tax payments to your plan. Conversely, if you are receiving a substantial tax refund you may want to reduce your estimated tax payments to free up some money for other purposes, such as contributing to an eligible, tax-deferred retirement savings plan.
Evaluate your past performance so you can achieve a personal best. Many marathoners are their own toughest competitors. They consistently look at how they can improve their own performance from race to race and year to year. When it comes to taxes, freelance professionals can benefit from monitoring the number and value of the tax deductions and tax credits that may be available to them at any given time. Keeping on top of the changes in the tax code is time consuming, so it may be worth consulting with a tax professional to make sure you are minimizing your tax obligations through these methods as much as possible.
Tackle tax trouble spots before they trip you up. The physical demands of a marathon often highlight “trouble spots” that cause pain and need to be attended to with rest or focused exercises. Looking at your past year’s return can also tip you off to tax-related trouble spots which may put the attention of the IRS on you and your freelance business. In fact, just by being self-employed you may be subject to more intense scrutiny by IRS tax auditors, so it’s important to make any necessary improvements in how you keep track of your financial records so that next tax season will be a little less stressful. Be sure to track all of your income and expenses and keep supporting documentation at hand. Also, avoid tripping yourself up by taking big write-offs for business expenses that are considered to have high potential for abuse by the IRS such as meals, entertainment and travel.
Fuel up for your financial future. The marathon mindset is all about long-term planning and delayed gratification. Using the same approach to your finances and securing your financial future can also help you lower your taxable income. Put aside the maximum allowable contribution to tax-advantaged retirement savings accounts if you can—especially if you didn’t in past tax years. Consider a traditional or Roth IRA (Individual Retirement Account) to help fuel up your retirement and shelter up to 20% of your earnings from taxes.
Consider enlisting a coach to help you along the way. Just like preparing for a marathon, preparing your freelance taxes can be grueling, especially without proper support from a mentor or coach. If this is the case for you—and while it’s fresh in your mind—reach out to a CPA who specializes in freelance taxes. They can help to coach you throughout the year and ensure that your tax bill is as low as legally possible.
Just like real runners, freelancers who have a “marathon” mindset tend to have the fittest and most successful businesses—and lower tax bills. Managing your money and tax obligations as a long-term process rather than a short-term “sprint” will not only strengthen your freelance finances, it will also alleviate the stress of scrambling to meet annual tax season deadlines and put you on the path to your personal and professional best.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.