Self-Employed? Don’t Make These Mistakes on Your 2022 Taxes
When an organization employs you, it manages your taxes for you. If that’s your only source of income, you only need one W2 and a few write-offs.
It’s different if you’re self-employed or a freelancer. Having many clients translates to many 1099s. Not to mention various business expenses (such as equipment and travel) and multiple payment methods (cash, check and PayPal among others) that you need to track. When you reach a certain income level as a freelancer, you might need to file your taxes quarterly.
Unless your field is tax management, you’re likely to make the following common mistakes when filing your 2018 taxes. Keep in mind that working with qualified and experienced accounting professionals will help you avoid overlooking these areas of your tax accounting.
Mistake #1: Failing to take advantage of all deductions you’re entitled to
Before you start getting your taxes in order, it’s a good idea to consult a professional. As a self-employed person, there are many expenses you can write off—expenses that otherwise aren’t tax-deductible.
As a self-employed person, the expenses you can write off include:
- Health insurance premiums
- Utilities, property taxes and other expenses used exclusively for the home office
- Business-related car expenses
- Self-employment retirement plan payments
- Education expenses toward improving your trade
- Business loan interest
Many self-employed people fail to take advantage of these deductions to which their entitled.
Mistake #2: Waiting till tax season to search for a good accountant
As a freelancer, it’s important that you develop a strong relationship with a qualified and experienced accountant. Such a relationship facilitates the free flow of information between a freelancer and an accountant and gives both parties the opportunity to ask relevant questions and seek clarification.
The problem is that many freelancers don’t bother building these relationships until accountants are already overwhelmed with extremely long work days at the peak of tax season. Most worthwhile accountants are by that time overwhelmed being crushed by the weight of their existing clients’ needs. As a result, they may not have time to help you make sense of your receipts.
The key is to plan ahead and identify an excellent accountant with whom you’re comfortable working. A good accountant lets you ask questions and fits well into your team.
Mistake #3: Failing to set aside part of their earning for taxes
Understandably, you have bills to pay. However, as a self-employed person, it’s imperative that you be prepared for your enormous tax bill when the time comes. Your tax bill appears massive because, unlike company employees, you don’t pay taxes every month.
It is for this reason that CPAs advice their freelancer or self-employed clients to save at least 30 percent of every dollar they earn. These savings ensure that you have enough set aside to meet your tax obligations. This “save it and forget it” strategy helps you avoid running into a massive lump sum tax liability when tax season arrives.
Mistake #4: Getting business and personal expenses mixed up
Avoid getting your business expenses and personal expenses mixed up by having separate business and personal accounts. In the event of an audit, the IRS will want to see separate records, especially in a case where it’s unclear whether an activity is business-related when a person reports net losses. A professional accountant can help set up separate accounts and show you how to operate them.
Mistake #5: Not keeping proper records
Most people don’t keep complete records. In modern self-employment, maintaining appropriate records need not be difficult thanks to the availability of a wide variety of cloud-based accounting software. Many of these accounting tools are affordable and offer powerful, seamless record-keeping features.
Just make sure you feed all the transactions correctly and sync the software with your bank account. With a few clicks, you can categorize all your transactions into the right income or expense account. These records make tax preparation easy.
Mistake #6: Failing to treat PayPal and similar services as a bank account
Top accounting professionals emphasize the importance of handling transactions on PayPal and similar services the same way you treat transactions on your regular bank accounts.
Whenever a customer or client deposits payment into your PayPal account, you should treat that as an income. If you use your PayPal account to make payments to independent contractors, suppliers, and so on, record those payments are business expenses. Not that transfers between bank accounts and PayPal are not considered incomes or expenses.
An experienced income tax attorney can help you avoid some of the costly mistakes outlined in this article. Contact us today to speak with one of our highly experienced tax lawyers.
