(Guest writer: Patrick Dodd)
We’re not sure how it happened, but it’s already the end of the year. If you’re like most freelancers, you’ve probably avoided thinking about your taxes until now. Actually, you’d probably still like to avoid thinking about them. But just a little bit of effort now will make a world of difference come Tax Day.
Here’s a short and quick reminder of some of the things you should think about before the end of the year to prepare for tax season. And trust us when we say, some of them can’t wait until next year.
1. Get Organized Now
The most important thing you can do when it comes to your taxes is stay ahead of the game. Ideally, you’ve been using some sort of system for keeping track of invoices and expenses. If not, it’s time to start compiling all of those loose documents.
That bucket of receipts you’ve been keeping under your desk? Start digging through that thing to find any items you can write off.
Here’s a list of some common write-offs for freelancers:
- Office supplies
- Books, magazines, reference materials
- Telephone and Internet expenses
- Cab, subway, and bus fares
- Business meals and entertainment
- Office rent
- Gas and electric
- Legal and professional fees
- Memberships (professional organizations)
- Messengers, private mail carriers, postage
- Business insurance
- Tax preparation
- Business loan interest
- Taxes and permits
- Home office (see Tip #5)
2. Stay Organized
As a freelancer, it’s important to not only get your records organized, but to keep them organized into the future. According to CPA Jonathan Medows, freelancers are always at a high risk of audit. He suggests keeping detailed records of your income and expenses for at least six years (three years longer than what the IRS recommends).
“If you are audited, the government will insist on seeing receipts,” he says. “People think that having a credit card statement is enough, but it’s not. If you buy something from Amazon, the government wants to know that they are surge protectors for your office – not toys for your kids.”
3. Defer Income if You Need To
If you’re already worried about being able to pay taxes on this year’s income (you’ve been setting aside 25 percent, right?), you might consider waiting to send invoices on the work you’re doing right now.
Hold off until mid-December and you most likely won’t get paid until January, meaning that’s income you won’t have to pay taxes on until 2016, giving you a little more time to catch up on how much money you should have been putting away for taxes.
This strategy also works well if you find yourself right on the edge of jumping into a higher tax bracket. Of course, whether or not you adopt this strategy will depend on what precedent you’ve set in the past – whether you claim income when payment is received or when services are rendered. Switching now might raise a few flags – actually, it definitely will.
4. Grab More Deductions
Another great way to grab more deductions is to offload as much cash as you can before the end of the year. That scanner/copier you’ve been thinking about getting? That new Mac Pro? That RED Epic Dragon? Pull the trigger and get those expenses on your 2014 books.
There’s no reason to wait until January when the write-off won’t do you any good for another year.
5. The Home Office Deduction
If you use a dedicated area of your home for your business, you can deduct a portion of your living expenses as a “home office” deduction. The calculation is pretty simple.
Just figure out what percentage your office space is of the total square footage of your home, and then multiply that percentage by the cost of living in your home (mortgage interest, property taxes, utilities, maintenance, etc.). That high rent you’re paying is finally going to pay off.
Use these tips to get yourself in tip-top shape before the end of the year. Just a little bit of planning and organization is all it takes to keep your taxes from overwhelming you later on. Trust us, you’ll be thanking yourself later.
(This guest post is written by Patrick Dodd for Hongkiat.com.Patrick is the president of blinksale.com, an invoicing app designed for small businesses & freelancers in mind. He is also an avid music guru, sports fan, and surfer.)