April 15th is around the corner, people. Are your taxes done?
This is truly a dreaded time of year and I say that with a keen ache in my heart in remembrance of tax days past. My first tax year as a freelancer was an absolute disaster! Basically, I made every rookie mistake in the book from not accounting for my 1099 deductions to failing to identify literally dozens of write-offs (classes, home office space, car interest, and relocation being a few of them). To top it off, I went to a general service for tax returns; the folks there did not understand my business at all and I ended up paying out the nose both to the IRS and for that service. Like all entrepreneurs, I had to get tax savvy about my particular business real fast.
Most of us don't come out of the womb understanding taxes, but they are a fact of life. Luckily, increased technology is making it a little easier. For example, 99Deductions is a new site for independent workers, freelancers and solopreneurs to quickly learn how to maximize take home pay and minimize taxes. The site's founder, Raj Bhaskar, is passionate about giving entrepreneurs a better life in his corner of the world (and in my opinion, getting them more money back on their tax returns is a very good place to start).
Here, Raj has identified the 5 most common tax blunders and schools us on how to avoid them. Take note!
1. Separate Your Accounts
Always have separate credit card and bank accounts for "Business" and "Personal" finances. Co-mingling your personal and business funds can be a recipe for disaster, especially if you get audited. By keeping your finances separate, it will be easier to see how well your business is doing, organize transaction records, file your taxes, and claim deductions for business expenses.
2. Don't Slack on Bookkeeping Until Tax Time
Make an effort to update your financial information on a regular basis. You will find it easier to remember the details of each transaction and save time and money when you need to file your tax return. If you're into using apps, try downloading Hurdlr on your smartphone -- it automatically tracks your expenses, deductions and taxes for you.
3. Be Mindful of Self-Employment Taxes
Don't forget that in addition to paying income taxes, the IRS requires that you also pay self employment tax, which is similar to the Social Security and Medicare that would be withheld from your pay if you had a 9-5 job. Currently, the Self Employment Tax rate is 15.3%. However, you can deduct a portion of this tax when you file your tax return at the end of the year.
4. Remember That 1099
As a self-employed entrepreneur and business owner you likely receive 1099s from your clients. No taxes are withheld from these payments, which means that you have some additional tax responsibilities. Plan on setting aside a portion of your earnings to cover your federal and state income taxes, as well as your self employment tax.5.
5. Deductions Are Your Friend
Chances are you're leaving money on the table by not claiming all of the deductions you are eligible for. In many cases, education and training expenses can be deducted, but are often overlooked. And automobile expense deductions are often misused, as its common to deduct both mileage and depreciation, even though you must only choose one of the two.
Keep these tips in mind this month as you wade through mountains of last year's receipts and fill out the obligatory paperwork. When you arm yourself with knowledge, it's possible to view the task of completing your taxes like a game or puzzle; as you become good at getting money back, (dare I say) you might even enjoy it. Hang in there, friends, and a peaceful tax season to you all!