Small businesses and freelancers are often left reeling when it comes to tax time. If you haven’t been making any quarterly estimated tax payments, chances are you could be in for a rude awakening, especially if this is the first year you’re receiving freelance income. Below are some tips that point out some potential tax savings, and some talking points for your Certified Public Accountant (CPA) or tax preparer this year.
1) Organize your bookkeeping:
You are taxed on Profits, which is equal to Income (Revenue) – expenses. Profit is the key number when taxes are calculated on your business no matter the way your business is organized, whether it be sole proprieter, LLC, S-Corporation, or C-Corporation. Many freelancers believe all their expenses are tax deductible and this can be true, but realize you cannot deduct 100% of expenses that are considered personal in nature. It is important to organize your bookkeeping in a system. There are many online services that you can use to aid you in this process.
2) Prepaying expenses:
If you have excess cash on hand in December consider prepaying some business expenses. As explained above, your tax liability is based upon your “Profit.” Prepaying expenses reduces your profit and means less taxes. If you anticipate having a profit at the end of the year making some prepayment for expenses like office rent, utilities, and accounting/tax fees can make a difference to your tax liability. You have until December 31st to make these payments for them to count for this tax year.
3) Retirement & College plan contributions:
If your business has some free-cash flow consider making retirement plan contributions. For 2014 and 2015 total deposits can be made up to $5,500 ($6,500) into a Traditional or Roth IRAs. The benefit of a traditional IRA is that you get the tax benefits today, whilst with a Roth IRA you will receive tax benefits when you retire. If you are considered “Self-Employed” also consider making deposits into a SEP IRA (Simplified Employee Pension plan). You can make IRA contributions up until April 15th, 2015.
Do you have children or grandchildren? Consider looking into 529 plans that will allow you to contribute tax free into a college plan. Your contributions into such plans are usually deductible on the State tax return, and earnings usually grow free for both Federal and State tax purposes.
4) Make Estimated Federal & State Tax Payments:
Now is the time to schedule an appointment with your CPA or tax advisor and figure out what you may owe in taxes. As a rule of thumb self-employed individuals may be taxed up to 30%+ of their profits depending in which tax bracket you fall under. Once you have an estimate you can make the payments electronically for the Federal government either through the EFTPS system or IRS-Direct Pay. Most States also have a way to make tax payments electronically – visit your State’s website or ask your CPA how. If you are getting taxed at a higher rate talk to your CPA about the benefits of converting to a S-Corporation which can add additional tax savings under certain circumstances.
5) Give to charity!
Consider giving to your favorite charities before the end of the year. Your generosity is rewarded with a tax deduction up to 50% of Adjusted Gross Income (Gross Income minus adjustments to income) if you itemize deductions. Any unused charitable deductions can be carried forward for five years. You can give either cash or property (stocks, clothing, vehicles etc…). Charitable gifts above $500 will require additional disclosures, so make sure to save donor acknowledgement letters and receipts from thrift stores. You should also make sure that the organization you are donating to is a registered charity – the most common being 501(c)3.
6) Do you or your business have any foreign bank accounts?
Be aware of the Report of Foreign Bank and Financial Accounts (FBAR). A United States person (Citizen or Resident) that has an aggregate value of all foreign financial accounts that exceed $10,000 at any time in a calendar must file this report. Learn more here. Failure to file the FBAR report can lead to penalties that can be draconian. The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to disclose to the IRS whether any US persons have a bank account at their branches. This means that the IRS will soon know whether you have a foreign bank account, whether you like it or not – so I recommend discussing this issue with your CPA if you feel it may have an impact.
Here is a thorough list of common expenses that you may be able to deduct (summary page here):
- Accounting fees
- Advertising
- Amortization
- Auto expenses
- Bad debts that you cannot collect
- Banking fees
- Board meetings
- Building repairs and maintenance
- Business association membership dues
- Business travel
- Cafeteria health-insurance plan (requires plan)
- Charitable deductions made for a business purpose
- Cleaning/janitorial services
- Collection Expenses
- Commissions to outside parties
- Computers and tech supplies
- Consulting fees
- Continuing education for yourself to maintain licensing and improve skills
- Conventions and trade shows
- Costs of goods sold
- Credit card convenience fees
- Depreciation
- Dining during business travel
- Discounts to customers
- Education and training for employees (new)
- Employee wages
- Entertainment for customers and clients
- Equipment
- Equipment repairs
- Exhibits for publicity
- Family members’ wages
- Franchise fees (new)
- Freight or shipping costs
- Furniture or fixtures
- Gifts for customers ($25 deduction limit for each)
- Group insurance (if qualifying)
- Health insurance
- Home office
- Interest
- Internet hosting and services
- Investment advice and fees
- Legal fees
- License fees
- Losses due to theft
- Management fees
- Materials
- Maintenance
- Medical expenses (with plan)
- Mortgage interest on business property
- Moving
- Newspapers and magazines
- Office supplies and expenses
- Outside services
- Payroll taxes for employees, including Social Security, Medicare taxes and unemployment taxes
- Parking and tolls
- Pension plans
- Postage
- Publicity
- Prizes for contests
- Real estate-related expenses
- Rebates on sales
- Rent
- Research and development
- Retirement plans
- Royalties
- Safe-deposit box
- Safe
- Software and online services
- Storage rental
- Subcontractors
- Taxes
- Telephone
- Utilities
- Website design
- Workers’ compensation insurance
