HOW TO PREPARE FOR TAX DAY 2017 (STARTING NOW)
Are you a freelancer or new small business businessowner who just got a nasty shock from your tax return? Trust me, I relate. Here are some quick tips for avoiding the same situation next year. [NB: This post is catered to US-based readers, but includes general advice that applies across the board!)
Find a tax preparer or CPA
You can try to file your taxes yourself, but that seems somewhat masochistic to me. I deal with my own taxes in the UK, where I make a much smaller income and don't have a registered business (on which, more below) but now that I live and make the vast majority of my money in the U.S. - as a non-citizen, to boot - I'm not taking any risks with the IRS. I found both my current New York accountant and former L.A. accountant through friends - personal recommendations are the best way to go when it comes to sourcing yours. You'd be surprised how affordable these types of services can be, and the right accountant is worth his or her weight in gold. Quite literally.
Know Your Entity
As a freelancer or businessowner in the US, you have a number of options when it come to choosing which entity to file as (i.e. Sole Proprietor, LLC, or S-Corp). The distinctions between each entity are complicated and each come with their own benefits and advantages, which I won't even pretend to be knowledgeable enough to go into here. Needless to say, a good accountant will be able to advise you on which entity makes most sense for you and your work.
Know Your Deductibles
Having to file your own taxes is one of the few really miserable parts of being self-employed, but the upside is that a whole roster of your daily expenses can be deducted from your net income (thus reducing the amount of self-employment tax you have to pay overall). Depending on the nature of your business, you can 'write off' a percentage of your outgoings on rent, work equipment, travel, utilities, and even some meals. Be sure to keep track of all your expenses throughout the year to ensure that you have a good grip on your deductibles come tax day.
DON'T FORGET YOUR 1099 FORMS
As a businessowner, it's highly likely that you'll be sending out 1099s as well as collecting them. As a general rule, you must issue a Form 1099-MISC to 'each person to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments'. So if you commission a designer, web developer, or any other skilled human being to work for you and pay him or her $600 or more, you're obliged to issue a 1099 towards the end of the tax year (just as you're obliged to supply all of your own 1099s to your accountant).
SET MONEY ASIDE
Um, yeah, kinda obvious but really worth reinstating. As freelancers, we're so used to living hand-to-mouth that we can easily neglect to set aside money for our taxes throughout the year. But if you can't 'afford' to put 10-20% of each payment into a separate savings account for your taxes, how the hell are you going to find the cash for your tax bill come April? After receiving an unexpected sting from the IRS this year, I'm determined to avoid repeating the same mistake again in 2017. Hence this article. Hope it helped!