Last Minute Tax Advice for Freelancers
This will not be your typical “latest tax advice” post. I am not going to advise you to remember any business expenses that you forgot, or to remind you that electronic registration can lead to faster refunds. Instead, I have two important tips for freelancers and sole proprietors filing 2018 taxes – both of which can save you a lot of money.
Find out how the tax system works
Accountant Catherine Pomerantz has a detailed guide to freelancing tax filing at The Creative Independent , which begins with a note on the importance of good tax planning :
The biggest disappointment in my job is the creatives who say “good enough” when it comes to taxes. Often these artists feel like they are too stressed, confused, or busy for proper tax planning, but paying too much taxes can hurt you both personally and professionally.
As a freelancer who has definitely paid too much money in taxes in the past, I agree. One of the best things freelancers can do for their careers is to learn how the tax system works. You won’t necessarily find this on CPA, by the way; I spent a couple of years working with a CPA who never mentioned that I could reduce my tax burden, for example by investing in a SEP IRA.
If I had known about the SEP IRA in those years, I could have instead put some of the money I owed to the government into the SEP and get an “over-limit” tax deduction, which in turn could have reduced the amount I paid. as premiums under the Affordable Care Act, as these loans and grants are based on your below-the-line adjusted gross income.
Therefore, while I always advocate the use of CPA, I am also going to advise you to learn as much as possible about the tax system and learn how to use it to your advantage. Especially this year, when there are all sorts of additional variables, such as a 20 percent deduction from business income .
Take some time to understand how freelance taxes work. Consider it part of your job, incorporate tax planning time into your daily and monthly workflow, and adjust hourly wages accordingly.
Don’t be afraid to take an extension
There is still time to take a crash course in tax planning and be done by April 15th – start with The Creative Independent’s guide, then check out the Freelance Alliance Tax Guide 2019 – but if you can’t do it all and meet your freelance clients’ deadlines, don’t be afraid to extend your tax return.
If you would like to file an extension for your 2018 taxes, you can submit an extension form for free using Free File ; otherwise, you will need to submit one of these forms to the IRS (the form you choose depends on whether you are filing as an individual or as a company). Completing this form gives you an additional six months to complete your tax return.
Be aware that completing the tax renewal form does not give you an additional six months to pay taxes. You must still provide the IRS with your most accurate estimate of the taxes you owe by April 15th. Luckily, you’ve probably already done so – because you paid your estimated taxes this year, right?
Likewise, if you are making last minute contributions to the IRA and HSA for the 2018 tax year, you must still make them by April 15th. You will not have an additional six months to contribute to these plans. SEP IRAs are different; if you renew, you can make SEP contributions up to the day you file your tax return.
(Plus, you still have to pay government taxes on time unless you file a similar extension to your state. Visit your state’s tax office website for forms and requirements.)
Why then do you need to extend the tax? Because you will have time to learn more about the tax system and file the tax return that is most beneficial for your freelance business. If you’re thinking of hiring a CPA – and I always recommend hiring a CPA – the extension gives you time to find someone who really understands how freelancers work (not all of them, as I’ve learned the hard way).
You can always request an initial consultation with a CPA to determine if they are suitable. Use this time to ask questions like “how many freelancers have you worked with in the past” and “what advice do you usually give freelancers?” Pay attention to their reactions when you describe your work; if they seem familiar with web design or web writing or whatever you’re doing, that’s a good sign. (If they ask “what is a blog,” that’s bad.)
According to the National Society of Accountants , the average CPA will charge about $ 176 to complete an undocumented federal and state tax return; however, you will likely pay more because you will be making additional appointments to discuss tax strategy, whether it is time to sign up, whether you need a business license, and more. I used to pay around $ 400, so don’t be surprised if you pay a little more than average.
These two “last minute tax tips” are actually advice not to file your tax returns at the last minute. When you pay taxes quickly, without considering all the possible tax benefits available to you, you run the risk of losing money.
And going from one freelancer to the next, you cannot afford to lose that money.