Recordkeeping Tips for Freelancers and Gig Workers So You Can Avoid Getting in Tax Trouble
If you are working as a freelancer or gig worker, you are certainly not alone. Millions of men and women are earning extra income driving for ride-sharing services, designing websites for online entrepreneurs, and writing for local businesses.
Some freelancers and gig workers have even said goodbye to their traditional careers, trading the security of a steady paycheck for the freedom and flexibility of gig work and freelance clients. But whether you are freelancing full time or just for extra cash, you need to keep careful records so come tax time, you can stay out of tax trouble.
Note: If you fall behind on filing your taxes, you’re not alone and we can help. Reach out to our tax resolution firm and we’ll help you file late tax returns and negotiate with the IRS if you owe back taxes.
Set Up a Separate Bank Account
Freelancers and gig workers play many roles but they all have one thing in common, they are also business owners.
Whether or not you have incorporated your business or formed a formal business, you do operate your own business. That means you need a separate bank account to collect your earnings and pay your expenses.
If you have not already done so, you should set up a separate bank account for your freelancing income. If you do have a formal business structure and an employer identification number (EIN), you can use that information to open the account. If not, you can simply open a second account to collect your payments and take care of any business-related expenses.
Print Reports from Payment Providers
Gig workers and freelancers are paid in many different ways, from direct payments from clients to automated clearinghouse (ACH) transfers to their bank accounts. These independent workers may also receive payment through third party apps like Paypal, Stripe and Payoneer, and keeping it all straight can be a real challenge.
Luckily many of the major payment providers make it easy to find out exactly how much their members received during a given time period. If you want to see where you stand, and how much tax you might owe, sign on and print out a payment report from every provider you receive income from.
You can fill out those reports with your own carefully kept records, including documentation of direct client payments and bank transfers. If you are unsure how much you have received via ACH, you can check with your bank or request a written report.
Signing up for a bookkeeping service or bookkeeping software can also help keep track of all your income and expenses.
Maintain Contact Information for Everyone You Have Worked For
During the course of a single year, freelancers and gig workers may work for dozens of individuals and companies, and they may receive payments from just as many sources. In a perfect world, everyone who hires those freelancers and gig workers would maintain their own records and send out 1099s for tax purposes, but that is far from guaranteed.
If you want to avoid unpleasant entanglements with the IRS, you need to keep your own records and check off each 1099 as it comes in. If you earned income from a client and do not receive a 1099, it is your responsibility to follow up and get the proper paperwork, so make your life easier and keep contact information from everyone you worked for, even if they were only a one-time client.
Keep a Running Tally with a Spreadsheet
It can be hard to track your income from freelance jobs and gig work, but a spreadsheet will make it easier. If you want to avoid underreporting your income and the tax penalties that could bring, set up a spreadsheet and record every dollar you earn from your freelancing and gig work efforts.
Keeping a running tally of your freelance and gig work income serves a number of different purposes. For one thing, it will help you determine the amount of your required quarterly income tax payments, so you do not overpay or underpay what you owe. Tallying your income as you go can also help you see how you are doing, making it easier to ramp up your freelancing and gig work efforts as you go.
Measure, Photograph and Document Your Home Office
As a freelancer or gig worker, you may be eligible for some generous income tax deductions, including a write-off for your home office. If you operate your freelancing business out of your home or find gig clients there, you may be able to deduct part of your utility bills, rent or mortgage and other applicable expenses.
Not just any space will do if you want to take the home office deduction, and proper documentation could be the difference between a valid deduction and a disallowed one. You must use your home office solely for your business, and it is important to keep careful records to avoid problems with the IRS.
That means measuring the space your home office occupies, so you can compare it to the total square footage of your home. It also means photographing the space, so you can show those images to the IRS if they question the deduction.
Scan Receipts to Make Tax Deductions Easier
You may also be eligible for additional tax deductions, including write-offs for office supplies, internet access and the like. But you will need to back up those deductions if the IRS comes calling, so make sure you have all those receipts on hand.
A shoebox full of paper receipts will not do, so make sure you scan or photograph those documents and keep them in a safe place. That could mean setting up a folder on your hard drive (with a backup plan in place), uploading the images to the cloud or a combination approach designed to safeguard records of your business-related purchases.
Life as a freelancer or gig worker can be wonderful, but keeping proper records is essential. From making tax planning easier and less stressful to saving you money, there are many advantages to keeping careful records.
If you do run into tax trouble, reach out to our tax resolution firm and we’ll schedule a free, no-obligation confidential consultation to explain your options in full to permanently resolve your tax problem.
9 Common Mistakes First Time Tax Filers Make That Can Land You In Tax Trouble
Being an adult has its perks, from being able to rent a car and book a hotel room to the chance to earn a living and rent an apartment. But life as an adult also comes with some challenges, including the burden of filing and paying taxes.
If this year is the first time you will be filing a tax return, it is important to plan ahead. Mistakes are common among first-time filers, and those blunders could delay a much-anticipated refund or even trigger an audit from the IRS.
Here are 9 of the mistakes first-time filers are likely to make - and how you can avoid them.
Note: If you or someone you know owes back taxes, our firm can help negotiate with the IRS and potentially settle your tax debt. Call us today. Our tax resolution specialists can navigate the IRS maze so that you have nothing to worry about.
1. Forgetting to file
When filing taxes is new, it is easy to forget to do it. Forgetting to file is a big risk for first-time filers, one that could have long-lasting implications for your adult life.
2. Not reporting all your income
As a first-time filer, it is easy to forget to report all your income, especially if you work a side hustle or participate in the gig economy, Failing to report all your income is a big no-no, and this mistake could trigger a visit from the IRS.
3. Not tracking the cost basis of your investments
If you invest in stocks, bonds, or mutual funds, you may owe capital gains tax when you sell, so it is important to track the cost basis as you go along. If you fail to track the cost basis, you could end up overpaying taxes on any future sales.
4. Paying for a refund anticipation loan
As a first-time filer, you are probably anxious for your refund, but paying to get it could be a big mistake. Unless you are in dire need, it is better to wait 7-10 days for your e-filed return to be processed and your direct deposit to land in your bank account.
5. Choosing the wrong filing status
If you choose the wrong filing status, your return could be delayed, or even rejected outright.
6. Not asking your parents if they are claiming you on their tax return.
If your parents are still providing support for you, they may be able to claim you as a dependent when they file their taxes. If you incorrectly claim yourself as a dependent in this situation, you could be in trouble with the IRS. Even more importantly, you could land your parents in hot water as well.
7. Failing to claim all your deductions
From student loan payments to mortgage interest, the IRS provides a wealth of deductions that can reduce taxes for first-time filers. Failing to claim those available deductions is like leaving money on the table.
8. Waiting until the last minute
Many first-time filers assume that their returns will be simple and that they can wait until the last minute to file. If you wait until April 15, you will be at the mercy of everything from closed post offices to a failed internet connection, so start early and get this chore out of the way as soon as possible.
9. Not planning for next year
When you are neck-deep in tax paperwork, it is hard to see ahead, but failing to plan for future taxes is a big first-time filer mistake. Now that your return has been filed, do some homework on additional tax deductions, including those for 401(k) and IRA contributions.
The April 15 tax filing deadline will be here before you know it, and when it is over you will have officially become a taxpayer. If you want your first foray into taxpayer status to be a successful one, avoiding the 9 mistakes listed above is a good place to start.
If you know you’ll have outstanding tax debt and owe more than $10k to the IRS or state but can’t pay in full, contact our firm today. We help people find tax relief and sometimes settle their tax debt for a fraction of what’s owed.
Lucky Day at the Casino? Don't Forget About the IRS
Whether you gamble all the time or only once in a blue moon, you are filled with hope and excitement every time you walk through those casino doors. If you have been gambling for even a little while, you already know that Lady Luck can be a fickle partner. Sometimes the gods of the casino smile upon you, and other times they turn their back. So, when you finally hit the jackpot, you are overjoyed and brimming with excitement…
At least until you consider the tax consequences of your good fortune.
Every time you walk through the doors of the casino, Uncle Sam is peering over your shoulder, and the IRS will be waiting with its hand out when good fortune finally smiles on you.
So, as you celebrate your big win, do not forget about your taxes; if you do, the IRS is sure to come calling. If you have any tax issues or find yourself owing a large amount in back taxes, reach out to our tax resolution firm and we’ll help you navigate any obstacles.
Ask About a W2-G
One of the first things you need to know about winning big at the casino is that the IRS will receive notice of how much you won. If you try to fudge the numbers or not report the win at all, chances are you will soon be on the wrong end of a tax bill.
It is important to report all of your gambling winnings, even smaller jackpots that may not warrant a W2-G, the form on which those monies are recorded. And if you do win a substantial jackpot, ask the casino workers about how and when the tax forms will be issued.
Understand Withholding
When you have a lucky day at the casino, it is easy to blow your winnings, especially if you have never been so lucky before. But before you spend your last dollar, you might want to keep some in reserve for when tax time rolls around. If you fail to keep that money available, you could be in for an unpleasant surprise, and a big tax bill, when you file.
Casinos know that their customers may have trouble paying taxes on their winnings, and that is why many of them will automatically withhold a portion of the jackpot. If you do win a substantial jackpot, make sure you understand whether, and how, this withholding will take place.
If you are concerned about having the money to pay the taxes due, you may be able to ask the casino to do the withholding for you. Not all casinos will be willing to do this, but it never hurts to ask.
Track Your Losses
The fact that you have to pay taxes on your gambling winnings may seem unfair and arbitrary, but the IRS is not entirely heartless. You may be able to write off some of the money you lost in the pursuit of your latest jackpot, but only if you can back up those numbers with hard data.
Tracking your losses is never a fun thing to do, especially if you are a regular casino visitor. Even so, it is important to keep track, and many casinos will do the work for you.
If you carry a casino loyalty card, you may be able to log on or request a report showing how much you spent, and how much you won, while your card was in use. This is not a perfect solution, but it can be a good first step if you plan to write off your losses in hopes of reducing your final tax bill.
Having a lucky day at the casino feels good no matter who you are, as does leaving the casino with a stack of cash and a big jackpot to your name.
But the next time Lady Luck smiles on you, make sure you leave a little for Uncle Sam.
If you find yourself behind on your taxes and owe more than $10,000, contact our firm. We’ll schedule a no-obligation confidential consultation to explain your options to potentially settle your tax debt for less than what you owe.
Made a Mistake On Your Tax Return? Here’s What To Do.
Tax returns can be complicated and tricky to understand. Even for a professional, it can be surprisingly difficult to get every number and detail right.
Often, you only notice the mistakes when you take a casual look at your return days after you submit it online or drop it in the mailbox. Or worse, the IRS sends you a letter telling you something is off.
So, is there anything that you can do after your return is in?
Actually, there's a lot that you can do. But if you don’t know where to start, it’s best to leave it to a professional. Our tax resolution specialists can navigate the IRS maze so that you have nothing to worry about. We help people who owe back taxes or have back tax debt. Call us today for a free consultation.
3 Major Types Of Mistakes
There are many red flags the IRS looks for on each tax return, but here are 3 common ones taxpayers make.
1: Not reporting all your income. No matter how much or little you make, report everything. In some way or another, unless you run a strict cash business (another red flag), all of your income is reported to the IRS. W2, 1099 and other forms you receive are duplicated and sent to the IRS. If your reported income doesn't match theirs, that's a red flag.
2: Overstating business expenses. Depending on the type of job you have, there can be many legitimate expenses that your employer doesn't reimburse you for. If you’re a business, you might be tempted to write off just a little extra. These might be genuine deductions. But don't try to deduct something that's not on the approved list and don't claim deductions way outside the norm. Check with your tax professional and stay up to date with tax laws so you’re not padding your tax return with write-offs.
3: Math errors. Whether you file electronically or still file paper forms, your information gets entered into a computer. And one thing computers are very good at is doing math. If things don’t add up, or there was an honest mistake in inputting the information, it can raise a red flag. A math error won't necessarily get you an audit, but it will get the attention you may not want. Make sure to double-check your returns and have a qualified tax professional assist you and keep you out of tax trouble.
Filing an Amended Return - The 1040X
Individual income tax returns filed with the IRS can be amended up to three years after the due date of the original return by filing IRS Form 1040X.
On a 1040X form, the IRS only asks to be shown what was originally filed, what the corrected details are, and the reason why you need to make changes. The form also includes a section where you get to change the personal exemptions that you've claimed on your tax return -- just in case you make a mistake listing your dependents.
A few tips on filing your 1040X form
● For each year that you need to make corrections for, you need to use a separate 1040X form and mail it in, in its own envelope.
● Each form should have the return year mentioned at the top.
● On the back of the form, you need to explain the changes you've made and your reasons for them.
● Any schedules, forms, or anything else that is affected by your change needs to be sent in with the form.
● If the corrections made to your federal form affect your state taxes, you need to send in a corrected return for that as well.
However, we strongly suggest consulting a tax resolution professional to help with your amended return. They can often file multiple years of unfiled tax returns, help you settle for a fraction of what you owe, and at the very least save you a headache.
You Have 3 Years
Many tax filers only notice a mistake on a tax return only when they look at it preparing their taxes the following year. Mistakes may come to their attention in one of several ways. They may share something with their tax preparer that they may have neglected to mention in the previous year. The tax preparer, then, may notice the need for amendments to a previous year's return, as well.
There is no set time period within which you must correct your return. You can do it any time you notice it. A general rule that the IRS follows, though, is to entertain corrections for 3 years after an original return is filed.
The 1040X is a paper-only form
Even if you always e-file your tax returns, you'll need to file the 1040X form as a physical, paper form. The IRS still isn't equipped to handle the 1040X form electronically. You also need to pay attention to where you mail it in - 1040X forms do not go to the same IRS service center address as regular returns.
If Correcting Your Mistake Results In More Taxes Owed, You Should Still Amend Your Return
If your tax return contains a mistake that shortchanges the IRS in a more serious way, chances are good that the IRS will discover it. For instance, if you made money off a freelancing job that you didn't file a 1099 form for, the IRS could find out and you could end up paying interest for a few years for the tax owed. If you catch it yourself, you'll save on interest, at least.
If you know you’ll have outstanding tax debt and owe more than $10k to the IRS or state but can’t pay in full, contact our firm today. We help people find tax relief and sometimes settle their tax debt for a fraction of what’s owed.
Self Employed? Smart Strategies for Minimizing Your Taxable Income
A lot of our clients that come to us with back tax problems are self-employed. For one reason or another, they fall behind on their taxes. With COVID-19, small businesses have been hit the hardest and despite the government stimulus bills, there are still millions of businesses teetering on the border of failure. It’s understandable that a few of them fell behind on their taxes and we’re here to help.
Our firm specializes in tax problem resolution. We have CPAs, EAs, and attorneys who can represent you before the IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.
Yet despite the COVID-19 pandemic, some businesses are actually doing much better this year, which means they’re going to owe taxes. So in this article, we want to share a few tips and strategies that can help prevent you from owing more than your fair share in taxes.
Being self-employed is great in many ways. You can enjoy the freedom and flexibility of working from where you want when you want, and you can build your own client list and keep all the profits from your hard work.
All that is great, but there is a significant downside to being self-employed, one that can take a bite out of your wallet. That means if you are self-employed, you have two jobs - delivering a quality product to your clients and minimizing your own taxable income. Here are some strategies for keeping your taxes as low as possible.
Shelter Income with a Self-Employed Retirement Account
One of the biggest perks self-employed men and women have is the chance to shelter significant sums of money through specialized retirement programs. Aimed directly at the self-employed, these retirement plans offer enormous benefits, and the chance to sharply reduce your taxable income.
Opening a SEP-IRA is one of the simplest ways to shelter your self-employment income and save for the future. The SEP-IRA works just like a traditional IRA; the main difference is that this program is designed specifically for the self-employed.
If you are willing to do a bit more work and keep a few extra records, you can shelter even more of your self-employment income with a solo 401(k). The solo 401(k) is basically the self-employment equivalent of the traditional 401(k) you are used to, but you control the money and how it is invested. Best of all, the contribution limits for solo 401(k) plans are even higher than those for traditional 401(k) plans, and maxing out could sharply reduce your tax bill when filing season arrives.
Contribute to a Health Savings Account If You Can
One of the biggest challenges self-employed individuals face is how to pay for health care. The price of privately purchased health insurance plans can be quite high, and that can make affordability a real issue.
One way to save money is by purchasing a high-deductible healthcare plan, and many self-employed people choose that option. If you do purchase such a plan, you may be able to reduce your taxes with a health savings account, or HSA.
To be eligible for a health savings account, you must have a qualified high-deductible health plan in place. Medicare recipients are not eligible for health savings accounts, but you can contribute pre-tax money and enjoy tax-deferred growth all the way out to age 65.
Push Payments into the Following Year
Compared to their traditionally employed peers, the self-employed have a great deal of control over their income and how they are paid. This control can extend to when you receive payment for services rendered, so consider deferring those end-of-year payments to reduce your current year's taxes.
If your clients are willing to go along and the timing is right for you, deferring payments until the next calendar year is one more way to reduce your taxable income. You will need to settle up with the IRS eventually of course, but this strategy can work well if you expect next year's income to be significantly lower than the current year.
Shift Investment Income into Tax Sheltered Accounts
If you earn investment income as well as self-employment income, shifting those funds into tax-sheltered accounts could lower your taxes and let you keep more of what you earn.
Keeping income-generating investments like bond funds and dividend-paying stocks in your IRA, for instance, is a good way to reduce your taxable income. This strategy will not work if you need the extra income now, but if you can live without it you can save money on your taxes.
Working for yourself can be great, but it can also be quite taxing. If you want to cut the high cost of self-employment while still enjoying the freedom and flexibility, the tips listed above can give you the best of both worlds.
OWE BACK TAXES?
If you’re going to owe money to the IRS after filing your return that you won't be able to pay, It’s important to note that only experienced firms like ours are able to handle tax debt cases since negotiating with the IRS requires specialized skills that often fall outside of the scope of most conventional accounting, tax, and tax law firms.
The Challenges Freelancers Face When Proving Their Income - and How to Overcome Them
Being a freelancer carries a number of important benefits, from the ability to make your own hours to the freedom to work from virtually anywhere. But being your own boss also comes with some serious challenges, including how to prove your income to a skeptical mortgage lender or reporting your income accurately when filing your taxes.
Not reporting your income accurately or failing to report your income can trigger red flags and get you into trouble with the IRS. This can lead to you owing back taxes if the IRS thinks your income is different than what it might actually be.
With COVID-19, you’re likely working remotely and maybe in the market for a new home. So when it comes time to borrow money, whether it is to purchase a new car for your freelance ride-sharing business or buy a home for yourself and your family, you may have difficulty documenting your income. That is because lenders are used to asking for pay stubs and W-2 forms, and they may not understand that independent contractors are paid in other ways.
This is where having complete tax returns for past years is important.
So how can you overcome these challenges? Here are some strategies for documenting your freelance income and avoid getting a surprise bill for back taxes owed to the IRS or State.
Note: If you owe back taxes and need tax relief, our firm can help! We specialize in resolving complicated self-employed and small business back tax problems. Contact our firm today!
Use an Online Payment Service
It can be hard for freelancers and other independent contractors to document their income, but using an online payment service can make it easier. Online payment providers like PayPal keep careful records of who they pay, how much money is disbursed, and where the money is coming from.
If you receive your freelance income through such a service, proving your yearly income could be as simple as printing off a report or emailing it to the lender. You may still need to provide additional documentation to your tax professional or the IRS, including bank statements but the payment report will be a good start.
Ask Your Bank for an ACH Report
For freelancers who are paid directly, an Automated Clearing House (ACH) report can serve the same purpose as a ledger from an online payment service. The ACH report will show when payments were made, along with the amount of each payment.
If you know you will need to prove your income, be sure to keep copies of your bank accounts for at least the past 12-24 months. Maintaining paper copies of bank accounts and saving electronic copies to your computer will ensure those critical documents are available when you need them.
Keep Your Past Years Tax Returns
As a freelancer or other self-employed individual, you have a responsibility to report all of your income, whether or not you receive a formal 1099 form. It is important for freelancers to keep careful track of their income and expenses, as this will make tax filing season much easier.
Once your taxes have been filed, you will want to keep copies of your returns for at least the last three years, but having more documentation is always better. Keeping copies of your tax returns is a great way to make sure your income is reported accurately year in and year out.
If you have years of unfiled tax returns, call our office. We can help file multiple years of returns.
Keep Your 1099 Forms
A single freelancer may have dozens of clients over the course of a year, and keeping track of all those payments can be a real challenge. If you want to make your life easier, setting up a filing system for all those 1099 forms is a good place to start.
Scanning each 1099 form as it is received and saving it to your computer or cloud account will make accounting a lot easier, but it will also simplify the process of applying for a loan or mortgage. Having this information at your fingertips will make it much easier to prove your income, so you can qualify for the loan you need.
Average Your Monthly Income
For freelancers, life is often feast or famine, with tons of work one month and nary a lead the next. That can make their income highly volatile, further complicating the loan qualification process.
These peaks and valleys in freelance income can be disconcerting, but over time experienced freelancers may detect a pattern that underlies the chaos. Freelancers who hope to qualify for a loan or mortgage should track their monthly income carefully, averaging out the numbers to reflect their true annual earnings.
This income averaging can be very useful when talking to lenders, especially when accompanied by documentation to back up those earning claims.
It’s Your Responsibility
Life as a freelancer can be wonderful, but it does make proving your income a bit more difficult and it can make tax season more complicated. One thing to always remember as a freelancer is that it’s now your responsibility to file and pay your taxes on time. We’ve helped freelancers who find themselves behind on their taxes because they failed to plan properly. We hope this article will help you stay on track but if you need help with back taxes, want tax relief, or need to file past years of tax returns, contact us today!
Our firm specializes in tax problem resolution. We have CPAs, EAs, and attorneys who can represent you before the IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.
Self-Employed and Gig Workers: Should You Claim the Home Office Deduction?
The rise of freelancing, self-employed, and gig work is one of the biggest labor stories of the last 20 years. More and more workers have been looking beyond the normal nine to five and making their own way in the world, creating an income they can rely on, one that is directly tied to their skills and abilities. COVID-19 only accelerated this trend.
Working as a freelancer or gig worker can also open up a world of tax savings possibilities. From retirement plans with generous contribution limits to health savings accounts to cover the high cost of private insurance to the ability to write off office supplies and other essentials, this class of workers enjoys some truly phenomenal tax breaks.
Generous Deduction or Audit Trap?
One of the most generous of those tax breaks is also one of the most misunderstood. The home office deduction has been around for decades, but many freelancers and members of the gig economy are still afraid to take it.
The idea that simply taking the home office deduction will trigger an audit is outdated but rooted in historical fact. In past decades, the home office deduction was widely regarded as a tax dodge, and the IRS often took a dim view of it.
Times have changed, however, and these days the home office deduction is no more likely to trigger an audit than any other business deduction. And while small business owners, including freelancers who claim their income on Schedule C, are still more likely to be audited, the overall audit rate is hovering at all-time lows. So should you take the home office deduction, and how can you tell if you are eligible? Here are some basic guidelines to go by.
Note: If you do find yourself under audit and owe the IRS money for back taxes, don’t try to fix it on your own! Reach out to our tax resolution firm and we’ll help you negotiate with the IRS and get tax relief.
Exclusive Use
One of the most important things to keep in mind is that your home office must be used exclusively for your business. Many freelancers and small business owners block off a section of their home and use it exclusively for their business, and that typically qualifies them for the home office deduction.
You do not have to give up large portions of your home to claim the home office deduction. Even a part of one room could qualify as long as it is distinct and separate from the rest of the area. You could, for instance, partition off a section of a spare bedroom and claim it as a home office.
Regular Use
In order to qualify as a home office, the space you claim must be used regularly as part of your business. If you block off a room or set of rooms, you cannot go back and forth between business and personal use.
If you plan to claim the home office deduction, it is a good idea to keep records of how the space is used. Keeping a log of the hours you spend there and the business activities you perform can help you back up the deduction if the IRS comes calling.
Primary Place of Business
The last part of the qualification process is the nature of the business and how the home office supports it. In order to qualify for the home office deduction, the space you designate must serve as your primary place of business.
That means your home office is where you meet with clients, where you perform your work and where you complete your business-related paperwork. If you rent space outside your home or regularly meet with clients somewhere else, you may not be able to justify the home office deduction in the event of an audit.
The nature of your business matters as well. If you work as a freelance writer or website designer, the IRS will probably not question your home office deduction. But if your primary source of freelance income is driving for Uber or Lyft, the tax agency may question the legitimacy of your home office.
Solid Recordkeeping is Essential
You should not be afraid to take the home office deduction if you are eligible for it, but you should be ready to back up your claim if the IRS comes calling. Solid recordkeeping is a must for freelancers and gig workers claiming a home office deduction, and those records should be highly detailed and readily available.
Keeping a daily log of your freelance and gig work activities is a good start. You can keep this log manually or electronically, but it should be up to date and complete. If you are diligent with your recordkeeping and eligible for the home office deduction, even a full-fledged audit could be no big deal.
The home office deduction is widely misunderstood and underutilized, especially in the age of gig work and widespread freelancing. If you are eligible for this generous deduction, you should definitely take it. Working for yourself is hard work, and every tax break you can get will make your efforts more valuable.
OWE BACK TAXES?
If you’re going to owe money to the IRS after filing your return, It’s important to note that only experienced firms like ours are able to handle tax debt cases since negotiating with the IRS requires specialized skills that often fall outside of the scope of most conventional accounting, tax, and tax law firms.
Our firm specializes in tax problem resolution. We have CPAs, EAs, and attorneys who can represent you before the IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.
Self-Employment Taxes and The Common Traps To Avoid So You Don’t Owe Back Taxes
People often dream of quitting their jobs and going into business for themselves so that they can pursue a passion and work without a boss. Self-employment can be a rewarding career decision, but it can lead to higher taxes and tax returns that are more complex than what you initially bargained for.
If you’re self-employed, it is important to understand how taxes work so you can avoid making a mistake and owing more than your fair share of taxes.
Note: If you owe back taxes and need tax relief, our firm can help! We specialize in resolving complicated self-employed and small business back tax problems. Contact our firm today!
Definition of Self-Employment
The IRS considers you to be self-employed if you work as a contractor, freelancer, small business owner, or are otherwise in business for yourself. If you earn income directly from clients and you don’t have an employer that withholds money from your pay for tax purposes, you are self-employed.
Tax Withholding and Estimated Taxes
If you work as an employee, your employer automatically takes a certain amount of money out of your pay each month to cover your tax obligations, which is called tax withholding.
Self-employed workers do not have an employer to withhold income for tax purposes, so they are responsible for paying their own taxes to the IRS through estimated tax payments. Estimated tax payments must be sent to the IRS on a quarterly basis if you expect to owe at least $1,000 in income tax at the end of the year.
The due dates for estimated tax payments are April 15, June 15, September 15, and January 15. Failure to plan properly and pay enough estimated taxes during the year can result in a tax penalty and a large surprise tax bill. If you pay at least 90 percent of the tax you owe or 100 percent of the total tax you owed from the previous year, the IRS typically will not assess a tax penalty.
Self-Employment Taxes
Self-employed workers must pay the self-employment tax (SE tax) which goes toward Social Security and Medicare in addition to normal income tax. Employees split the cost of paying into Social Security and Medicare with their employers, but self-employed workers must pay the full amount themselves.
We always recommend hiring a professional to handle your taxes and stay compliant, but we especially recommend hiring a qualified tax relief firm if you find yourself behind on any taxes or you’re hit with a large tax bill you can’t afford to pay.
Do I Have To Report Side-Income If I Have A Normal Job As Well?
Individuals with self-employment income must file an income tax return if they have a net income from self-employment of $400 or more. In addition, you must report any self-employment income you make during the year on your taxes even if you hold down a normal job.
For example, if you work as an employee year-round but you take on small contract jobs on the side to make extra cash, that money must be reported as self-employment income when you file your tax return even if you don’t make enough extra cash to warrant paying estimated taxes.
It’s a common misconception that you don’t have to file or report income if it’s “cash” or if it’s from a side hustle. Not reporting it could lead to more trouble than it’s worth and the IRS will add penalties and interest on top of the taxes owed.
OWE BACK TAXES?
If you’re going to owe money to the IRS after filing your return, It’s important to note that only experienced firms like ours are able to handle tax debt cases since negotiating with the IRS requires specialized skills that often fall outside of the scope of most conventional accounting, tax, and tax law firms.
Our firm specializes in tax problem resolution. We have CPAs, EAs, and attorneys who can represent you before the IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.
The Procrastinator's Guide to Surviving Tax Day
If you are a procrastinator, tax filing season is probably the worst time of year. With deadlines looming, filling out all those complicated forms and making sense of an increasingly complex tax code that changes almost every year can seem like an overwhelming task. But no matter how long you put it off, the April 15 tax filing deadline will arrive, and what you do to get ready will make all the difference.
Most Americans voluntarily file their tax returns and pay their taxes. Most people explain it by saying they want to pay their fair share. Others file to get a refund, claim a credit or avoid breaking the law.
There are times when normally law-abiding citizens fail to file. Why? IRS research shows that sometimes people don’t file in years their filing status changes, such as due to the death of a spouse or divorce. Emotional or financial reasons may cause a person to not file. Or it could simply be due to procrastination.
Unfortunately, failing to file a return creates additional problems.
So here are some timely tips you can use to get your taxes done on time and steps you can take if you do miss the April 15 filing deadline.
Note: If you fall behind on filing your tax returns, you’re not alone and we can help. Reach out to our tax resolution firm and we’ll help you file late tax returns and negotiate with the IRS if you owe taxes.
Communicate With Your Tax Professional Early
Getting a jump start on tax filing season starts with communicating with your tax professional early. If you wait until the last minute, they’ll likely have less time for you and you’re leaving too many chances to make a mistake on your tax returns which can often cause more trouble in the future.
Gather Forms as They Arrive
Facing the tax deadline with a stack of papers is daunting even for the non-procrastinator. For those with procrastination tendencies, that mountain of paperwork can induce a sense of dread and even panic.
Instead of waiting until everything is ready to go, gather each tax form as you receive it and save it in a special folder on your computer.
Find Your Tax Return for Last Year
It is very important to have your prior year's tax return available, so find it before you begin. Nothing is more frightening for a procrastinator than trying to find this vital form at the last minute, so make sure you have it before you need it.
The tax return you filed last year will be required to verify your identity, an important step the IRS implemented in the face of growing identity theft and tax filing fraud.
If you haven’t filed for the previous year, now is the time to do it. You already will likely owe penalties and interest so procrastination makes the debt even worse.
If You Miss the Deadline
As a procrastinator, you know that things do not always go as planned. Last minute snags do happen, and despite your best efforts, you might still miss the April 15 tax filing deadline.
The good news is that you can file an extension. Whether you are using tax prep software or filing your return online, you can request an extension and instantly get six additional months to file.
That does not mean, however, that you can avoid paying what you owe. If you think you might owe money to the IRS, you still need to pay the tab, and that is where last year's return will come in handy.
You can avoid penalties if you pay at least as much as you owed last year, so verify the numbers and act accordingly. And now that you have an additional six months to file, it is time to stop procrastinating and get moving.
Being a procrastinator can have its benefits. Sometimes a decision made deliberately and slowly is preferable to one made in haste, something procrastinators know very well. But when it comes to filing taxes, procrastination can make an already stressful time even worse. If you want to survive tax filing season with your sanity, and your wallet, intact, you need to work smarter, not harder, starting with the tips listed above.
A tax resolution firm like ours has years of experience helping taxpayers just like you resolve IRS and State tax problems and negotiating the best deal on your behalf. If you’ll owe the IRS money for 2020 or prior years, contact us now for a consultation to learn about your options.
The good news is the IRS has several debt settlement options including their Fresh Start Initiative and is generally willing to settle with taxpayers who have been blindsided by a surprise tax bill and can’t pay it off in full.
Hopefully, tax filing season will bring the big fat refund you are expecting, but it is important to be prepared for the unexpected. The new tax bill has unleashed a host of unintended consequences, including smaller refunds and surprise tax bills. By being prepared, you can reduce the pain of a surprise tax bill, so you can get on with the rest of your life.
How to Amend a Tax Return for a Prior Year
Tax returns can often be filed with incomplete or incorrect information, leading you to more tax trouble than you bargained for. If you filed early, you might have overlooked income from a temporary job or a side gig, only to get a 1099 or late W2 for the income earned.
Other filers may eventually realize that they were entitled to an extra deduction or exemption. The Internal Revenue Service routinely processes a significant number of amended returns each year and provides a specific form for changing the status of an earlier tax return.
Individual income tax returns filed with the IRS can be amended up to three years after the due date of the original return by filing IRS Form 1040X. However, we strongly suggest consulting a tax resolution professional to help with your amended return. They can often file multiple years of unfiled tax returns, help you settle for a fraction of what you owe, and at the very least save you a headache.
Note: If you know you’ll have outstanding tax debt and owe more than $10k to the IRS or state but can’t pay in full, contact our firm today. We help people find tax relief and sometimes settle their tax debt for a fraction of what’s owed.
How Amended Tax Returns Work
Returns containing simple math mistakes are usually corrected automatically and do not require an amended return. Filing an amended return should be considered after the filer realizes the need for a change in filing status, income, allowable deductions or credits. The statute of limitations generally allows three years for each filer to claim any tax benefit not included on a prior return.
An increase in reported income is likely to result in additional tax due, but an additional deduction or allowable tax credit could result in a refund.
Unreported income is a common oversight and it’s better to report your income than it is for the IRS to come after you and add penalties and interest to your tax debt.
Form 1040X is not eligible for electronic filing and must be mailed in, this is also why we recommend hiring a professional to do this for you. A separate Form 1040X is necessary for each year being amended, and each must be mailed in its own envelope to the address provided in the instructions.
The amended return essentially adds the corrections to the original return. There is a block of space on the form to explain all changes. The explanation for each line change should include the line number followed by a clear reason for the change. Lines that entail no change need no explanation. A copy of the original return itself should not be attached, but any added IRS forms must be included to support the changes. Any other supporting documents necessary to substantiate the amendment will also need to be attached.
It can take several weeks for the IRS to process an amended return. An amendment to the federal return might also require a change to the state tax return of the filer, especially if an increase in income is to be reported.
OWE BACK TAXES?
If you’re going to owe money to the IRS after filing your return, It’s important to note that only experienced firms like ours are able to handle tax debt cases since negotiating with the IRS requires specialized skills that often fall outside of the scope of most conventional accounting, tax, and tax law firms.
Our firm specializes in tax problem resolution. We have CPAs, EAs and attorneys who can represent you before the IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem.