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This isn't your usual 'last-minute tax tips' article. I'm not here to remind you of any forgotten business expenses, or to mention that filing online can speed up your refund. Instead, I’ve got two key pieces of advice for freelancers and solopreneurs filing taxes for 2018—both of which could save you a significant amount of money.
Understand How the Tax System Functions
Accountant Katherine Pomerantz provides an in-depth guide to the freelance tax-filing process at The Creative Independent, starting with a note on the significance of strategic tax planning:
One of the most frustrating aspects of my job is when creatives settle for 'good enough' when it comes to taxes. Many artists feel overwhelmed, confused, or too busy for proper tax planning, but paying excessive taxes can negatively impact both your personal and professional life.
As someone who has definitely overpaid on taxes in the past, I can relate. One of the best things freelancers can do for their careers is to understand how the tax system operates. You probably won’t hear about this from a CPA, by the way; I spent years working with one who never mentioned that I could lower my tax burden by contributing to a SEP IRA, for example.
Had I known about the SEP IRA back then, I could have redirected some of the money I owed the government into the SEP, earning an 'above-the-line' tax deduction. This might have also reduced the amount I paid in Affordable Care Act premiums, since these credits and subsidies depend on your 'below-the-line' adjusted gross income.
While I always recommend working with a CPA, I also urge you to educate yourself about the tax system—and learn how to leverage it for your benefit. This is especially important this year, with all the new factors like the 20 percent qualified business income deduction.
Dedicate time to understanding how freelance taxes work. Treat it as part of your job, allocate time for tax planning in your daily and monthly routine, and adjust your hourly rate accordingly.
Don’t hesitate to file for an extension
There’s still time to get a crash course in tax planning and have everything ready by April 15—start with The Creative Independent’s guide, then explore The Freelancers Union 2019 Tax Guide. But if you can’t manage to get it all done and meet your freelance clients’ deadlines, don’t hesitate to file for a tax extension.
If you plan to file an extension for your 2018 taxes, you might be able to file the extension form for free with Free File. Otherwise, you’ll need to submit one of these IRS forms (the form you choose depends on whether you’re filing as an individual or a business). Filing this form grants you an extra six months to complete your tax return.
Keep in mind that filing a tax extension doesn’t give you six more months to pay your taxes. You still need to provide the IRS with an accurate estimate of the taxes you owe by April 15. Fortunately, you’ve probably already done that—because you did pay your estimated taxes this year, right?
Similarly, if you’re making last-minute IRA and HSA contributions for the 2018 tax year, those still need to be made by April 15. You don’t get an extra six months to contribute to those plans. SEP IRAs are an exception; if you file for an extension, you can contribute to SEP plans until the day you submit your tax return.
(Also, you’ll still need to pay state taxes on time, unless you file for a similar extension with your state. Visit your state’s tax website to find out about the necessary forms and requirements.)
So why file for the extension? Because it gives you the opportunity to learn more about the tax system and file a tax return that will be most beneficial to your freelance business. If you’re considering hiring a CPA—and I always recommend doing so—the extension allows you the time to find one who truly understands how freelancers operate (not all CPAs do, as I found out the hard way).
You can always schedule an initial consultation with a CPA to see if they’re a good fit. Use that time to ask questions like, 'How many freelancers have you worked with?' and 'What kind of advice do you typically provide freelancers?' Pay attention to their response when you talk about your job; if they’re familiar with web design, web writing, or whatever your work entails, that’s a good sign. (If they ask, 'What’s a blog?' that’s a red flag.)
According to the National Society of Accountants, the average CPA charges about $176 for a non-itemized federal and state return; however, you’ll likely pay more, as you’ll need extra meetings to discuss tax strategy, incorporation, business licenses, and more. I’ve paid around $400 in the past, so don’t be surprised if you end up paying a bit more than the average rate.
These two 'last-minute tax tips' are really just advice to avoid filing your taxes at the last minute. Rushing through your taxes without considering all the potential tax benefits could end up costing you money in the long run.
And, as a fellow freelancer, that’s money you can’t afford to lose.
