Getting Ready for Tax Time
The deadline to file tax returns is still a couple months away, but those W-2s and 1099s are probably starting to show up in your mailbox. If you are like most people, you probably aren’t looking forward to settling up with Uncle Sam, but the more actively that you prepare, the less the stress level will be come mid-April.
When you first get those 1099 or W-2, a slight feeling of panic arises: you didn’t do all those things that you were supposed to do last year to make your taxes easier. All those receipts and pay-stubs that you should have saved are in a landfill somewhere or maybe still at the bottom your shredder (if you are someone who is paranoid about ID theft). Your W-2s and 1099s should, fortunately, be sufficient, unless you get audited.. However, creating a paper trail for all your transactions and deposits can make it easier to file your taxes and can also be useful if you are ever audited.
Collecting receipts is obviously the best way to prove that you made the purchases that you are writing off as business expenses. Again, this is mainly because you need to add these receipt totals to your tax forms and have evidence should Uncle Sam send his underlings to audit you. Actually, most audits take place via mail or over the internet, so having some sort of paper trail that you can use to send or scan as evidence can save you from a face-to-face audit. If receipts aren’t handy, hopefully, you paid with a credit or debit card, so there is still some sort of record of the purchases that you want to write off. Creating a paper trail early can save you from a panicked search for important scarps of paper later.
Also, the IRS is notorious for changing what can be and cannot be written off and for the seemingly arbitrary limits on certain types of tax credits (such as home improvement credits). Perhaps this is where a paid accountant could come in and straighten out the details and maybe even find a few loopholes to save you some extra cash.
Perhaps the most important and most easily forgotten tax feature for self-employed people or people who earn extra income for business is self-employment tax. Business-owners (including freelancers) don’t have social security tax or medicare tax automatically taken out of their checks. So, even though you are wiping your forehead and breathing a sigh of relief because your total earned income did not put you in a higher tax bracket, your tax will not end up being only 15% or 25% of your total earned income.
Self-employment taxes can add a significant amount to your total bill. If your income is relatively low, then this tax will probably make up the majority of your mid-April payment. Business write-offs can help lower the amount of social security and medicare tax, but it won’t make them go away. Putting money in your own retirement account (an IRA – but not a Roth IRA – or other SEPs account, for example) can lessen your self-employment tax burden significantly. Unfortunately, if you haven’t done it by now, it is hard turn these deposits into a tax break on your 2011 returns. A good accountant may be able to get you an extension so that you can make a deposit that can be credited to last year’s taxes, but that is not something that you can count on, even if you pay the big bucks for a good accountant with some serious tax-time savvy.
If you want to go through an accountant, give them all the information that you can. That might even include compiling a spreadsheet that has all your earnings and expenses for the year. This can be useful for a couple of reasons. First of all, it may lessen the time that the accountant has to spend on your taxes, which will lower your tax prep bill if the accountant is on an hourly rate (most good ones are). Also, the more detailed info that a good accountant has, the more likely it is that they will be able to find write-offs.
Of course, finding a good accountant, especially if your taxes go beyond the 1040 EZ basics, is imperative. The high-school graduate at your strip-mall tax prep office probably knows enough to complete your return in a audit-proof way, but when it comes to more-savvy tax-time maneuvers, a good accountant with experience can be a huge money-saver. When choosing your tax savior, it is best to rely on personal recommendations, or, failing that, at least some online research. If you have complicated returns, this is arguably the most important hing that you can do to get ready for April 17th. That’s right you have two extra days to put it off this year.
About Josh Lew Josh Lew lives in the Midwestern US when he is not traveling. He is a columnist for Gadling and has contributed to Hackwriters and Skive Magazine.