Tax Professionals Reveal 6 Common Self-Employment Tax Mistakes5 min read
Taxes are relatively easy when you work in a traditional job, especially if it is your only source of income. You have one W2, maybe a few write-offs, and that might be that.
As a freelancer, it’s a whole new ball game. You may have dozens of clients—which may mean dozens of 1099s. You may also have a lot of travel and equipment expenses. You’re getting paid via direct deposit here, via PayPal there, and via check or cash from someone else. There’s a lot more to keep track of, and then, once you start earning enough self-employment income, you may have to start filing quarterly.
It’s hard to be an expert in your field and also an expert at managing your taxes. That’s why we look to the professionals—and many of them were kind enough to give us their advice in the six common mistakes listed below.
Mistake #1: Not Knowing What You Can Write Off
New Jersey-based accountant Tanner Shields of Wagner, Shields & Jennings, PC, stressed the importance of planning and consulting with a professional before you even begin to organize your records.
“Being self-employed allows you to write off a ton of different expenses—Expenses that you normally wouldn’t be able to write off,” he said. “You can deduct a portion of your cell phone bill, you can deduct your health insurance payments, get deductions for miles driven for business, even claim a certain percentage of your home office. A lot of self-employed people don’t take full advantage of every deduction they’re entitled to.”
This sentiment was echoed by tax expert Kelly Phillips Erb during a recent #AskForbes Twitter chat: “Freelancers UNDER-deduct because they’re scared of making a mistake,” she said. The way to avoid this, of course, is to consult with professionals ahead of time.
“Proper tax planning will allow you to take full advantage of the tax laws that are in place,” added Shields.
— Forbes (@Forbes) February 10, 2017
You can take a look at some the most commonly missed or miscategorized tax deductions here.
Mistake #2: Looking for an Accountant During Tax Season
Nancy McClelland, a small business tax expert and blogger, wants freelancers and accountants to develop strong relationships—the types of relationships that allow for the free flow of information between both parties, as well as the opportunity for lots of questions and clarification.
The issue? A lot of the time, freelancers don’t try to develop those relationships until the accountant is already bogged down with 16-hour work days during the height of tax season. “By that time, we’re all knee-deep in our existing clients’ needs, and most of us don’t have time to help you organize your receipts,” said McClelland.
By planning ahead you can, according to McClelland, “find an accountant who you feel comfortable with, ask them a million questions, and develop a relationship with them, involving them on your team.”
Mistake #3: Not Saving Enough to Pay Your Taxes
Yes, you’ve got bills to pay, but as a self-employed person, you also need to be wary of that big bill when tax time comes—especially because you’re not paying taxes every paycheck like someone who holds traditional employment.
That’s why CPA Anthony Panetta gives the following advice to clients: “For my clients who are starting up or who are self-employed, I like to recommend the ‘rule of 30 percent,’ meaning for every dollar brought in, save 30 cents. By doing this, it allows the business owner to budget appropriately for their total tax obligation.”
He calls this a “set it and forget it” approach, which allows freelancers to “avoid a huge tax liability all in one chunk come tax time.”
Mistake #4: Keeping Poor Records
Accountant and blogger Caleb Newquist often finds that people keep “inadequate or incomplete records.” Fortunately, in the 21st century, there’s an easy solution for that.
“Spring for some cloud-based accounting software,” said Newquist. “It’s not that expensive and they make bookkeeping easier than ever. Just sync up your bank account to the software and all the transactions feed right into it. From there, it’s just a matter of a couple of clicks to categorize them in the appropriate revenue or expense account. Use those numbers to help prepare your tax return.”
(Editor’s note: Try AND CO for easy invoicing, expense reports and time-tracking.)
Mistake #5: Not Realizing PayPal is a Bank
Steven Zelin, AKA “The Singing CPA,” stressed the importance of treating your PayPal transactions just as you would regular bank transactions.
“If customers are making payments to the company, the deposits in the PayPal account should be recognized as income. If you are paying out money from the PayPal account for business purposes (supplies, independent contractors, etc.) you should record these as business expenses. Any transfer from the PayPal to another bank account is not income or expense—it’s just a transfer from one bank account to another,” said Zelin.
Besides consulting with an accountant, Zelin also suggested going right to the source and reading the IRS’ rules.
Mistake #6: Mixing Personal and Business Records
One of the best ways to fend off mixing your business spending and personal spending is to have a separate checking account for business use only, according to New York-based Certified Financial Planner Stephen Friga.
“In case there is ever an audit, the IRS loves to see separate records, particularly when there is a question as to whether an activity is really a business when net losses have been shown,” said Friga.
All of the tax professionals we spoke to, though, shared one piece of advice in common: They said you should consult with them. Early and often.
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