We’re just over one month away from the deadline for filing your taxes. Have you put it off, or have you already taken care of them? I have put it off, not because of the IRS fear, but because this year has completely gotten away from me so far. I mean, really, how did it get to be March so soon?
I enlisted the help of a few experts to create list of tips to help you prepare this year’s tax returns and to prepare for next year.
- Make record-keeping easy on yourself. Debra Yergen, author of the Creating Job Security series, has an easy system for keeping your receipts organized. “Carry a ‘receipts’ envelope in your purse, briefcase, or car. When you get a business-related receipt, jot any relevant notes on it and add it to your envelope. When the envelope begins to get thick, drop it in an IRS box at home and grab a fresh envelope. Every few months organize your receipts,” Yergen said. Having your receipts together and labeled when tax time comes around will make it easy to account for all of your deductions.
- All expenses directly related to your business are fair game. Many writers forget some eligible expenses when completing their tax returns. Retired CPA and author Jeffrey Taylor reminds us that “anything that has the direct benefit of generating income, i.e., computer, business phone, isp, website development, publicist, accountant, tax advisory, book publisher, business driving and travel to conferences, education” are eligible deductions.
- All deductions should make sense. When writing off an expense, think about whether you can justify it easily. Because, Yergen said, “if you get audited, you are going to have to make a case to the IRS for the decisions you made.”
- Sometimes, its better not to deduct everything. “The worst threat is being declared a hobby by the IRS instead of a business,” said Taylor. “A business must generate income at least for two years within a five year period.” If you haven’t generated a profit recently, you may not want to write off everything. Generate a profit this year to keep your status as a business.
- Keep up on your quarterlies. Cathy Golsticker, a CPA who works with freelance writers, has an equation to help writers who have day jobs know when they need to makes quarterly estimated tax payments:Self-employment tax rate of 15.4% (assuming day job wages are below $106,800, other-wise SE tax rate is 2.9%) + income tax rate (estimated (25-28%) = 40% (rounded) tax rate times net income from freelance
Deduct from this amount the expected tax refund (what you usually receive in a typical year)
Equals: Annual federal tax estimates to pay in
Now divide by 4 for the quarterly amount.
Goldsticker also cautions writers not to forget about state estimated tax payments. Check with your accountant or your state’s department of revenue to get rates and deadlines.
- Consider incorporating. According to Michael T. Hanley, CPA and author of Effective Tax Planning for the Microbusiness, “Most writers who earn $250 or more each year will end up paying less tax each year by operating as an S-Corporation.” In addition, Hanley said, writers who incorporate have “an audit risk that is approximately nine times lower than the audit risk of any writers who report all income/expenses as if they were personal income/expenses.” [Note: I’ll be going back to Hanley to find out a little more about incorporating. Stay tuned for an April post on this topic.]
Writer’s Digest also posted some further tax tips. What are your favorites?