Working For Yourself? Avoid These Common Tax Pitfalls
The world is changing. The rise of international connectivity and high quality consumer tech has given rise to a gig economy with people taking their careers into their own hands ands working for themselves in a huge variety of fields. Of course the likes of writers, accountants and graphic designers have been doing this or years but with changes in the business and economic landscape a rise in online consumer services like Uber and Air BnB has seen a rise in people drawing income from these services either for a living or to supplement their day wage.
While it’s encouraging to see people assert themselves entrepreneurially in this way, many people are doing so without a clear idea of their tax obligations. If you’re just starting out, it’s important to avoid these common tax pitfalls.
Failing to recognize yourself as a freelancer
A lot of people make money freelancing as a “side gig” alongside their day job, and assume that because they’re paying tax at work, they don’t have to pay tax on their freelance wages. Nothing could be further from the truth. These people have the same tax obligations as a full-time freelancer, therefore are obliged to pay income tax and self-employment tax. Those making over $200,000 a year are also expected to pay a Medicare surcharge.
Not getting the help you need
Time is money, especially when you’re a freelancer. Whether freelancing is your living or a lucrative sideline, it’s important to reach out to people who can help you with your taxes to avoid overspending. Hiring a tax controversy attorney could be the most prudent investment you could make, especially if you find yourself audited.Entrusting your accounting and bookkeeping to professionals will also save you time and money in the long term.
Failing to keep track of your expenses
The last thing you want is to spend the first two weeks of April on your knees, sifting through paperwork and tearing your hair out in frustration. Therefore, it’s important to log your income and expenditure on a weekly or monthly basis.
This also means carefully logging your income-related expenses. Believe it or not, up to 73% of freelancers fail to declare their tax-deductible expenses at all, meaning that the IRS takes a disproportionately sizeable bite out of their income.
With this in mind it’s vital that you know exactly what counts as a tax deductible expense. If your day-to-day business operations require the use your car, you should be aware that your vehicle mileage, repairs, tax and maintenance can qualify as deductibles. If you work from home then a portion of your rent or mortgage interests, property taxes and utilities can be deducted, as can any expenditure on computers and office supplies, as well as your internet / phone use. Monies spent on advertising and marketing costs, professional coaching or training as well as licensing or registration to professional bodies are all deductible.
Whether you’re a full time freelancer or a salaried worker pulling in freelance work on the side, you can create a massive headache for yourself if you mismanage your taxes. Make sure that you’re ahead of the game by keeping on top of your monthly income and expenditure and seeking help where you need it.