Five Ways to Avoid a Tax Audit as a Freelancer

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Freelancers & the IRS Audit

As a freelancer, one of the most frightening things you will ever experience is an audit from the IRS. Audits are scary for anyone, but they are especially scary for a freelancer who may not even realize just how much they’ve been holding back from the IRS. Though it’s a scary process, it’s something which can easily be avoided with a bit of elbow grease.

Here are five ways you can avoid a tax audit as a freelancer:

Refusing to Report Income

Missing income can be a huge red flag for the IRS, especially because according to the IRS, they know when you make money even if you don’t report it. No 1099? Getting paid under the table? It doesn’t matter, make sure you’re reporting it as long as it’s over $400.

Reporting Too Many Business Expenses

As a freelancer you have the opportunity to mark lots of things as business expenses; however, make sure whatever you deem to be business related really is just that. The more business expenses you have, the more red flags you’ll put up to the IRS because they’re trained to notice a fluff of business expenses.

Home Office Expenses

A home office expense is something that most freelancers and business owners claim, making it one of the most popular expenses to deduct. Because of this, the IRS is pretty strict on what you can call a home office, and if you’re trying to deduct a portion of your bedroom or kitchen you may as well forget it because the IRS isn’t going to accept that.

Miscalculations

If you’re responsible for doing your own taxes as a freelancer you are bound to make lots of mistakes, especially because you’re probably not calculating your numbers correctly. Also, be careful not to round your numbers up too high or down too low. The IRS also pays attention to miscalculations, and if you’re making numbers up it is bound to raise red flags.

Yearly Business Losses

If you are supposedly losing money year after year in your business, the IRS will take note. You won’t be penalized for your losses, but it will make the IRS wonder if in fact you are lying about losses just so you can protect your personal assets.

The best thing you can do to protect yourself from the IRS audit is to simply hire an accountant or a CPA to do the work for you. It will save you a lot of time and a lot of money in the long run.

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Five Things You Need To Know About Freelance Taxes

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Freelance Issues

As the gig economy continues to grow more and more, Americans are classifying themselves as freelancers. With this growth comes a level of ignorance of tax laws. Here are five things you need to know about freelance taxes:

All Income Must Be Reported―With or Without a 1099

Even if you never receive a 1099 from your employer you are still required to pay your taxes. It’s vitally important that you do what you can to keep track of every dollar you earn, because if you don’t, it could come back to hurt you in the long run and could also increase your chances of being audited by the IRS later in life.

Nothing Below $400 Should Be Filed

Did you recently make $100-$400 on a side project that you worked on for a neighbor? No worries. Anything that is under $400 does not have to be filed. Additionally, when you are classified as self-employed you have the ability to subtract your business expenses which in some cases could have you bringing in less than $400 in net profits.

You May Have to Pay Additional Taxes on Your Income

This is where things can get sticky. As a freelancer, you are both an employee and an employer which sadly means you are now responsible for not only paying the employee side of taxes but also the employer side.

Claim Your Expenses

Do you have a home office or a place in your home that you designate as some sort of home office? There’s great news! You can actually claim that portion of your expense. Additionally, you can also claim things such as rent, mortgage and property taxes. Items such as cleaning supplies may also be deducted under certain circumstances.

Don’t Be Afraid to Hire an Accountant

If you are unsure of how to handle your taxes as a freelancer don’t be afraid to hire an accountant. An accountant can work with you to make sure you are properly documenting and reporting all of your freelance income.

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4 Deductions Self-Employed Professionals Should Utilize

Being self-employed can often feel like having two jobs rolled into one: not only do you have your work or service you provide, but you often have to solicit new business, do your own marketing, bookkeeping, expense tracking and so on. Although you’d likely be best served by a CPA, here are a few deductions to help maximize your tax return.

Tax Calculator Freelance Deductions

Tax Deductions

Business travel costs

Track everything when you travel for work! This includes gas, meals, lodging, airfare, train tickets, even regular maintenance on a work vehicle. Remember that any non-business activities along the route cannot be deducted as a business expense. That means if you take a detour to see your parents on the way to a business conference, you cannot deduct any expenses incurred related to your detour.

Social security taxes

You can write off half of what you pay in social security taxes. This is only applicable if you’re self-employed and thus are paying the full 15.3% tax by yourself, instead of splitting the cost with an employer.

The home office deduction

Your business may have an office or facility, but odds are if you’re self-employed you do at least some work at home. While no one really enjoys bringing their work home, the good news is that if you have a dedicated business work space in your home, you can deduct that from your tax liability. This includes part of your rent, any associated utilities (e.g., your internet service fee), or you can use the simplified method: deduct $5 for every square foot that qualifies for the deduction.

Health insurance premiums

If you’re self-employed you can deduct medical insurance premiums for yourself and your family. Further this applies whether or not you itemize your deductions, but you’re automatically disqualified for the deduction if you are eligible for employer-sponsored health insurance through another job.

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How Artists Can Benefit from a CPA

Freelance Artists Tax CPA

Freelance Artists

Freelancers tend to be busy in general, and freelance artists are perhaps even more busy than the average freelancer. When you’re a freelance artist, you’re simultaneously your own employee, manager, PR agency and HR representative. This means that you’re likely super busy. Because time is important to artists, organization is key and a good CPA can help you stay manage your affairs. Here’s a few specific benefits a CPA can bring to the table:

A CPA can help you make sense of your earnings and expenses: you’ve got clients, vendor fees, invoices, and supply costs to worry about. All of this is in addition to creating your art! Brutal! However, a CPA can help you put all of that in order to ensure that you claim appropriate deductions and credits, and pay the correct amount of taxes, which gives you fewer things to worry about.

Tax recommendations: you spend time performing, practicing, or creating, so you might not always be thinking about expense tracking. A good CPA can make recommendations on deductions and tax credits, which will help you know what expenses you should track for tax purposes. Doing so can help maximize your tax return, which in turn can give you more to reinvest into your art. Or use it to take some well-deserved time off.

They can free up your time so you can focus on your art: you’re busy maintaining all aspects of your business. Moreover, certain art mediums are not immediately replicable and serviceable as many hourly or salaried job tasks, meaning that artists tend to work odd, long, and inconsistent hours. Along with properly maintained records, a good CPA can help free up your time so you can focus on doing what you love.

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How to Be Organized for Tax Time as a Freelancer

Freelance Freelancer Tax Issues

Freelancer Issues

Freelancing can be simultaneously rewarding and stressful. Unlike most in-house jobs, which have an HR staff, a sales staff, and so on, freelancers often have to wear many professional hats. Accordingly, organization for freelancers is paramount, and here are a few tips to help freelancers stay as organized as possible when it comes time to file taxes.

Spreadsheets are your friend: you already know that it takes a lot of organization to be a freelance employee. Between dealing with clients, tracking expenses, filing invoices, and maintaining your professional and personal schedules, a good ol’ spreadsheet or expense tracking app is invaluable. Not only will your clients appreciate how organized you are, you’ll be thankful for it at tax time. Your CPA will thank you, too.

Make record-keeping a part of your regular to do list: although the automation features of many organization apps can decrease the time you will need to dedicate to staying organized, you will still need to set aside time to put your business in order. Making self-organization part of the regular routine will help make your business run more smoothly overall.

Find a good CPA: if you’re a solo freelancer, your time is valuable and you likely account for time more so than the average employee. A good CPA can not only crunch numbers for you at tax time, but can also make recommendations to help you maximize your return. A larger return allows you to reinvest in your business (or take a vacation), and the extra time frees you up to focus on your work. Or to take that vacation early.

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  • Huddleston Tax CPAs / Huddleston Tax CPAs – Bothell
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