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There’s a surprising amount of misinformation floating around about taxes that’ll make things seem a lot more complex than they really are. Here, I’ve compiled the top 5 myths, and why they’re wrong. It’s like tax mythbusters!
No, you don’t need to hold onto paper receipts for everything
There's a common belief that you need to have a receipt for every tax deduction claimed at the end of the year. Some people have overflowing glove compartments, shoeboxes, and grocery bags full of them from years and years ago.
While it’s true that receipts used to be the only valid form of proof, that is no longer the case. The truth is that the IRS considers bank and credit card statements completely legitimate forms of records for the vast majority of tax deductible expenses. The only exception is if you’re buying things with cash for over $75 (under $75, you don’t need one).
So don’t worry about hoarding all those receipts. We live in the 21st century! Any credit card purchase of other digital transactions are already recorded online, constituting completely legitimate proof of purchase.
You probably don’t need to track your miles, either
If you drive a car for your 1099 or freelancing work, you can claim deductible car expenses on your taxes. While it’s true that tracking your miles gets you 58 cents back per mile, it’s also a big hassle and requires you to constantly classify or note down trips and their purposes.
Tracking miles is probably going to cost you money on your taxes. On average, people who drive less than 20,000 miles per year for work get a bigger tax break by claiming car expenses than mileage. So unless you’re an Uber driver or otherwise work a very travel-intensive job, you don’t need to be tracking miles.
Tracking car expenses, instead of miles, is also easier. Simply add up your gas, insurance, and servicing costs at the end of the year. Some services do this for you, but even some banks will let you export your year’s worth of expenses and categorize the car expenses automatically.
You can claim the home office deduction without a dedicated room
Not all of us have a large, many-bedroom house where we can claim an entire room as a home office. However, that doesn’t mean you can’t claim the home office deduction. Simply ensure that you have a workstation located somewhere in your house or apartment where you do work and don’t watch Netflix or other personal activities. Then, you can claim a portion of all your housing expenses as a tax write off!
Tracking tax deductible expenses matters even if you’re only freelancing part-time
We get this question a lot from part-time 1099 contractors / freelancers. The truth is that the standard deduction does not trade off with itemizing 1099 work expenses. It’s additive — meaning that you can claim both! That means even if you have a full-time W2 job and only do limited part-time 1099 contracting work, neglecting to claim work expense tax deductions is like donating money to the IRS!
Yes, you should file quarterly (estimated) taxes
Quarterly taxes, also known as estimated tax payments, are required for all contractors and freelancers. Not paying them means you’ll owe a penalty that increases for every month that the payment is delayed.
The good news? Filing your quarterly taxes is a lot easier than you might think. It just takes 5 min, and doing so means you’ll avoid a nasty penalty from the IRS. The easiest way to do it is to assume a 25% effective tax rate on the 1099 contracting / freelancing income you earned during the quarter. It gets even easier if you were doing the same contracting / freelancing work last year because in that case you can just pay a quarter of your last year’s tax payment. That’s it.
Paul was a freelancer for long enough to develop a deep hatred for taxes. Especially quarterly taxes.Today, he's the founder and CEO of Keeper, a service that helps freelancers automatically find tax write offs in their credit card statements.