How To Prepare For Tax Season

It’s open season on taxes

HELPFUL TIPS to MAKE THE UPCOMING TAX SEASON LESS…TAXING

When people hear the word “taxes”, their minds turn to April. But one of the biggest mistakes many freelancers make is waiting too long to start preparing for tax season. Putting things off until the filing deadline approaches adds stress, often leads to costly mistakes and missed advantages, and ends up eating into a freelancer’s most precious resource – their time. With just a little prep work, April can be a month devoted to generating income, not scrambling after paperwork from multiple income streams and tracking down receipts and documents. 

Freelancers have some special considerations when it comes to tax time. We’ve put together some questions to consider and some helpful dates to add to your calendar, so you’re ready and waiting when April rolls around.

Do you need an accountant or tax-preparer?

The first thing you need to decide is whether to work with a professional tax preparer or to handle it yourself. Keep in mind that tax preparers still require you to organize documentation of income and expenses, so they don’t actually take the whole thing completely off your plate. They do, however, save you time in terms of processing and filing, and their expertise can identify ways to save that might not occur to you. So, you need to consider how the time and headaches you save and the savings they may offer balance out against the costs of hiring them.

How should you choose an accountant?

If you choose to outsource to a tax professional, the best way to find a good one is through your network of friends and colleagues. If you work with any attorneys, they may also be able to recommend someone. Whomever you hire must have an authorized “preparer tax identification number” (PTIN) to prepare federal income tax returns. Be sure you understand their fees, which are generally based on the complexity of your return. Avoid any firm that takes a percentage of your refund. The IRS provides a link to the IRS directory of preparers, which you can search by credentials and location, as well as offering additional tips about what to look for. Of course, you can also browse the Fiverr Marketplace for a tax preparation service that may suit your needs.

How should you compile your documents?

Towards the end of January, start checking that you have documentation from all of your clients, as well as from your financial institutions and others with whom you did business during the last calendar year. Make sure to contact anyone you haven’t heard from by the first week of February and check that the information matches your own records on each form.

The most common forms include:

• 1099 forms for income from incorporated clients
• 1099-MISC for non-employee compensation, particular to independent contractors 
• 1099-DIV for dividends
• 1099-INT for interest 
• 1099-B from brokers that reports losses and gains on gains and losses on securities transactions, (due by mid-February)
• 1098 for interest paid on a housing mortgage 

How do you deal with receipts?

Staying organized year-round is much more efficient than scrambling as deadlines approach. In fact, such scrambling can lead to costly errors and omissions. Make both paper and virtual files for hard copy and electronic receipts. The minute you receive one, make sure it goes directly into the appropriate folder.

Keep bills you issue organized. If you are working with a business management system like Fiverr Workspace, it will do this for you automatically and all you’ll need to do is hit “download” when the time comes.

How will you get the most from your deductions?

All taxpayers are entitled to a standard deduction, a portion of your income that isn’t subject to tax and reduces your bill. The IRS calculates the amount based on filing status, age, and whether you are disabled or claimed as a dependent on someone else’s return. It’s adjusted each year for inflation. 

You’ll need to choose whether you want to itemize your deductions or claim a standard deduction. Taking the standard deduction is much easier than itemizing because it doesn’t require you to keep track of qualifying expenses and receipts, then calculate and report them. But considering all the things you can deduct if you itemize, it’s often not as cost-effective for freelancers.  Given the range of deductions available to full-time freelancers, itemization is often an advantage.

If itemizing, deductible expenses include:

• Home office, which means some portion of your mortgage or rent may be claimed. The IRS has a nifty calculator you can use.
• Educational expenses 
• Depreciation of property and equipment, even if it does not need immediate replacement
• Travel expenses, whether public transportation costs or costs relating to your car (or other privately owned vehicle of almost any sort)
• Business travel expenses beyond transportation, which include food and lodging 
• Cell phone equipment purchases, fees, and maintenance
• Computer and printer purchases, software, and maintenance
• Health insurance and additional costs, though they may be subject too limits 
• Other expenses costs, such as business insurance, bank fees and business interest, startup costs, advertising, consulting and professional service fees, self-employment tax (see below), retirement savings, the qualified business income deduction, tax advice, property taxes and investment-related expenses, and charitable donations 

Additional details and how-to information about all of these is readily available on the web.

What if the April deadline is approaching and you’re not ready? 

If you need more time, you can request an extension to October 15th. File your request by the regular April 15 deadline to avoid penalties and interest. To request an extension by mail, use form 4868. 

What is the difference between Income Tax and Self-employment Tax?

Income tax is the tax all citizens pay on their annual income. A progressive tax, the percentage is based on tax brackets, such that the more you make the higher your tax rate. 

Self-employment tax is just for those who work for themselves, which comes out to 15.3% of your net income – 12.4% for Social Security and 2.9% for Medicare. (If your net earnings exceed $200,000, you may also be responsible for an additional 0.9% contribution to Medicare.)

Do I have to pay all my taxes together at once?

Not at all! In fact, the IRS allows you to pay “Quarterly Tax Estimates” to avoid the “tax shock” of hefty payments at the end of the tax year. Simply estimate your quarter’s earnings and submit the appropriate percent as payment with form 1040-ES by mail, or pay online. You can even pay by phone or mobile device, using the IRS2Go app. Set dates for quarterly filing are listed in the calendar below. 

Remember, you will still need to file your annual return at the end of the tax year. At that time, you’ll need to calculate how much you owe across the full year. If you underestimated your quarterly payments, you’ll have to pay the balance with your return.

Visit IRS.gov/payments to view all your payment options. For even more information, refer to Publication 505, Tax Withholding and Estimated Tax. 

What are the key dates I need to keep in mind to avoid late fees and penalties?

Enter the following dates into your calendar for 2022 to make sure you’re on schedule and avoid complications that can cause you headaches and stress and get in the way of your productivity. All dates refer to postmarks and e-file time stamps, so get them in by the end of the day!    

January 15, 2022 4th-quarter 2021 estimated quarterly tax payment due 

April 18, 2022 1st-quarter 2022 estimated quarterly tax payment due

Individual annual tax returns due for tax year 2021

        Last day to make a 2021 IRA contribution

       Last day to request an extension

June 15, 2022 2nd-quarter 2022 estimated quarterly tax payment due 

September 15, 2020 3rd-quarter 2022 estimated quarterly tax payment due 

October 15, 2022 Individual annual returns due, if you filed for an extension for your 2021 taxes. Complete and e-file or have it postmarked by midnight 

January 15, 2023 4th-quarter 2022 estimated quarterly tax payment due 

Tax season may not be as fun as the other seasons in the year, but it doesn’t have to be painful. Now’s the perfect time to set yourself up for success by building routines that keep you organized, on time, and on track.