bookkeeping

5 Tax Mistakes Freelancers Need to Stop Making

Aja McClanahan — Wed, 07 Feb 2018 09:00:06 +0000

No doubt about it, being a freelancer is hard. From serving clients to staying on top of your money game, there's no shortage of work to do. Sometimes, things may be overlooked or set on the back burner while you tackle pressing business matters. However, there is one major thing that just can't be ignored — taxes.

As your own chief financial officer you'll need to be aware of major tax missteps that could ultimately ruin your business. Ideally, you'll engage the help of an experienced small business accountant who knows the ins and outs of tax strategies for freelance business owners. However, you've got to have your ducks in a row to double and triple check their suggestions and advice, too. (See also: What Freelancers and Side Giggers Need to Know About Income Taxes)

These are the top tax mistakes freelancers really need to stop making.

1. Not paying self-employment tax

As a freelancer, you probably have a number of clients that pay you without deducting any taxes. Because you are a contractor, you are responsible for any and all taxes on your income.

Self-employment tax is a term that covers two main taxes: Social Security and Medicare. As an employee of a company, your employer would cover part of this tax. However, lucky you, since you are your own employer, you get to pick up the tab on the entire tax bill.

On the other side of paying all these taxes, you do get some reprieve by deducting a portion of these payments from your gross income, which can reduce the amount of taxes you owe overall.

Just know that it's very important to pay self-employment taxes on your freelance income. If your client issues you a 1099 form, it's also transmitted to the IRS. The IRS becomes aware of this income and can demand you to make an accounting for that money if they suspect you owe taxes on it.

2. Not having an accounting system

Making a lot of money as a freelancer can also increase your tax liability. If you don't have a good system in place to track all of your income and expenses, you could end up paying more (or less) taxes than you're supposed to.

Charleen Fariselli is a CPA who has worked with small businesses for over 10 years. She says that freelancers who don't accurately track income and expenses are at a disadvantage. "This affects their taxes because they don't have a good accounting system and are often losing deductions so they pay more in tax," she says.

Charleen also adds that a lack of a good accounting system can have an impact on making timely, accurate tax payments: "These freelancers can't calculate what their taxable income is each quarter for making tax payments, so they over or underpay, if they pay at all."

The good news is that there are many accounting software options out there to help you organize your books, including QuickBooks, Xero, Wave, and Freshbooks. You can also use a simple Google Sheets document. (See also: 5 Free Accounting Tools for Freelancers)

3. Mixing business with pleasure

One of the worst things a freelancer can do is allow their business expenses and income to spill over into their personal finances. For example, a business owner may use a business credit or debit card to cover a personal expense like purchasing groceries for their family.

The biggest problem with this behavior is how it affects record keeping for tax filing purposes. Joshua Zimmelman of Westwood Tax & Consulting says that bad record keeping can cause confusion for freelancers at tax time. "Too many freelancers miss out on deductions because their finances are not organized," he says. "Separating your expenses from the start makes filing your tax return so much easier."

If you need help keeping your personal and business finances separate, you can opt for a business checking account or credit card. You could also use both.

If you do have to use money from your business dealings to cover personal expenses or vice versa, make sure you keep a record of such transfers. A small business CPA can help you categorize (loan, owner draw, paycheck, etc.) the transactions so that you don't run into problems with record keeping or tax liabilities. (See also: The 5 Biggest Mistakes Freelancers Make)

4. Neglecting retirement savings

The freelance life can be a roller-coaster ride of feast or famine, but it's still important to keep savings in the equation — especially retirement savings. Saving for retirement is not only critical for your golden years, but can also help you save on taxes.

When you put money away for retirement, it reduces the amount of your income tax withholding. Joanna Zarach is a consultant who helps freelancers plan for retirement. She says, "Solo retirement plans are the most effective way to lower your tax bill now and to build tax-free growth in your investment accounts."

There are different options to save for retirement. Some smart options include:

Individual 401(k): This type of account is ideal for solopreneurs who want higher contribution limits. You can save with pretax dollars while receiving tax deductions for employer contributions (you are the employer) as well.
SEP IRA: Tax-deductible contributions are made by the employer (in this case, you). Growth is tax-deferred until withdrawal.
ROTH IRA: With this type of retirement account, you save after-tax income that grows tax-free forever.

5. Neglecting health care contributions

Paul Jacobs is a CPA, EA, and officer at Palisades Hudson Financial Group. He says he often sees freelancers, "Forgetting to deduct health insurance premiums. A great tax break that is available to the self-employed is the ability to deduct this expense."

As a small-business owner, there are tax benefits when you pay insurance premiums for yourself and family members. Premiums for medical, dental and, in some cases, long-term health insurance qualify.

Reporting these premiums on your taxes can reduce your adjusted gross income (AGI) which can make you eligible for certain tax breaks. The only caveat here is that you may now have to itemize deductions in order to take advantage of this deduction come tax time due to the recent Tax Cuts and Jobs Acts of 2017.

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Free Accounting Tools for Freelancers

Kat Tretina — Fri, 17 Mar 2017 10:30:17 +0000

As a freelancer, you're responsible for every aspect of your business. Not only do you need to deliver a great product, but you also need to manage your expenses, invoice clients, and handle your own taxes. And as a freelancer, time is money. Instead of juggling spreadsheets and files yourself, check out these five accounting tools that are completely free.

1. Zoho

Zoho is one of the most robust bookkeeping platforms out there. With the free version, you can invoice up to five customers a month. And you can track expenses, customize your invoices, receive online payments, and manage timesheets.

2. Due

If your business is growing and you need to be able to accept credit card payments rather than just cash or check, Due may be the solution for you. Due is free to use, and you can send invoices and get paid online. Due charges a processing fee of 2.8%, and promises to match any lower offer.

3. PocketSuite

For people running smaller businesses, such as dog-walking services or housecleaners, some of the bookkeeping software can be overwhelming with unnecessary features. And many of them don't offer essential features those freelancers need, such as scheduling or client contact options.

Pocketsuite is a mobile app that allows you to connect with clients and manage your business finances all in one spot. With the free "Pro" version, you can schedule appointments with clients, send professional invoices, accept credit card payments for a flat 2.5% processing fee, send messages to your customers, and even accept tips.

4. PayPal

PayPal allows users to upgrade to a free business account in order to receive credit card payments for purchases and create invoices as needed. You won't pay a transaction fee for shopping through your personal account, but upon receiving funds for goods or services, you will pay a 2.9% fee, plus $.30, of the total amount received. PayPal also lets you run reports on all funds coming and going, so you can seamlessly track your professional finances.

5. Wave

Wave's bookkeeping and accounting services are completely free; you only pay a fee if you add employees. They also charge a 2.9% processing fee if you accept credit card payments from clients.

You can track your expenses and income, and with the easy-to-use platform, it's easy to manage even if you don't have experience in accounting. Everything is cloud-based, so you can check your account and update your information from any computer or mobile device.

Best of all, Wave generates tax reports that will save you time and money at tax time, making your life — and your accountant's — much easier.

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This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

18 Year End Financial Must Dos

Kate Lister — Sun, 11 Dec 2011 22:23:20 +0000

Link:

http://www.openforum.com/articles/18-year-end-financial-must-dos

There are financial moves you need to make before year-end if you want them to impact your 2011 financial statements and taxes. Some can even affect your ability to raise money, secure vendor credit, or sell your business in 2012, 2013 and beyond. With 2012 fast approaching, the time to act is now.

Must Dos that Make a Bad Year Look Better

1. Make a last ditch effort to collect from delinquent accounts, even if you have to negotiate on the amount. If you can’t, you’ll probably want to write them off as bad debt. Not doing so will hurt your accounts receivable turnover ratio—a red flag for lenders and investors.

2. Encourage other customers to pay before year-end, too. But before you offer an early payment discount, be sure it won’t take too big a bite out of your overall gross profit margin—another financing red flag if it declines from prior years or is below industry standards.

3. Ask for progress payments on projects already underway and see if you can secure deposits for any that will begin this year.

4. Delay paying bills that can wait until 2012.

5. Offer year-end specials on slow moving inventory. This will improve your inventory turnover ratio—something that will please your banker.

6. Sell any underperforming property and equipment that is fully depreciated.

Must Dos that Make a Good Year Even Better

7. Wait to deposit any new checks until after the first of the year.

8. Purchase property or equipment that qualifies for Section 179 or 100 percent bonus depreciation, as these benefits are likely to be scaled down in 2012. Note that qualifying equipment has to be in service before year-end.

9. Make charitable contributions.

10. Pay employee bonuses.

Must Dos To Do in Years Good or Bad

11. Download copies of all your year-end bank and credit card account statements. Don’t forget those PayPal, investment, and Google Checkout accounts. You’ll need proof of 12/31 balances and they’re sometimes hard to come by after the fact.

12. Try to pay down any bank lines of credit, preferably to zero. Lenders like to see that you’re using them as intended—for temporary or seasonal needs. Maintaining a balance year-round suggests that they’re being used for long term financing.

13. Take a close look at your inventory. You can reduce your taxable income and improve your inventory turnover ratio by writing off any obsolete items.

14. Carefully consider whether the IRS or other government agency might look at anyone you treat as a contractor and decide they’re actually employees. Desperate for revenue, governments are hot on the trail of such misclassifications. If you think you may have misclassified workers in prior years, you might be pleased to know the IRS recently announced a program that can reduce the penalties for admitted transgressions, but you need to have at least filed 1099’s for those contractors in each of the last three years. A word of caution if you plan to fess up—the IRS isn’t the only agency that can make your life miserable if you’ve misclassified workers. Be sure to get advice from a competent attorney or accountant before you proceed.

15. If you incurred costs to start a business in 2011, but haven’t yet made a sale, hurry up and sell something! Anything! You can’t deduct any of those expenses in 2011 unless you do.

16. If you’re planning to squirrel money away in a 401k, keep in mind that while it can be funded in 2012, the account has to be in place by December 31, 2011.

17. If your personal income will be relatively low this year, consider converting your traditional IRA to a Roth IRA. Fidelity has a handy calculator to help you figure out if this is a good move.

18. Take a look at your investments and decide if it’s time to cash out. The special treatment of Capital Gains at a maximum tax rate of 15 percent is set to disappear at the end of 2012. After that, they’ll likely be taxed at ordinary income rates. If your capital losses exceed your gains, you can carry them forward to offset future capital gains.

Finally, most experts agree that tax rates will increase after 2012 and tax breaks will be harder to find. Be sure to consult a qualified professional about whether these and other strategies are right for you. A good place to start is with those who contributed their tips for this article: Brian Price—founding partner of Dallas-based PriceKubecka, Rick Dlugasch—CPA with Boston-based Waldron Rand, Robert Mahoney—president of Belmont MA-based Belmont Savings Bank, and New Jersey-based Gail Rosen, CPA.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: