Are you an expert on the U.S. tax system? Do have the time to become one?
My guess is that your answer to the above two questions is “No?”
If you are an expert on an increasingly complex tax system, you can significantly reduce your tax bill EVERY year, particularly if you’re a freelancer responsible for your own self-employment taxes rather than an employee whose tax bill is the same for every paycheck. However, taking the time to become an expert could significantly reduce the time you spend earning money in your field of expertise.
If you want to maximize your tax savings AND minimize the time you spend on your tax returns, you should consider a professional tax accountant. How much can tax accountants help independent contractors? Here’s a statistic to give you an idea — about 93 percent of small business owners reported that they had paid too much in taxes in the past 12 years.
Let’s review five more reasons why freelancers should consider a professional tax accountant:
1. Question-based DIY software doesn’t capture nuances
Determining your eligible deductions is not necessarily black and white. The tax code doesn’t specify exactly what’s deductible for every self-employment trade.
Instead, the IRS only says that a business expense must be both “ordinary and necessary”. An ordinary expense is defined as one that is “common and accepted in your trade or business”. While a necessary expense is defined as “helpful and appropriate for your trade or business”.
Starting to see how there could be room for interpretation?
Let’s say you visit a client in Florida, and while there decide to spend some time taking in sun on the beach. Is that trip deductible? How do you pro-rata the expenses associated with your business versus personal?
2. Fully benefiting from the new tax breaks
The Tax Cuts and Jobs Act passed in late 2017 goes into effect this year for the first time. It’s the biggest reform of the tax code in over 20 years, impacting freelancers in many ways.
While some of these changes are straightforward, such as the restrictions on deducting entertainment expenses starting in 2018, keeping track of all these changes so you can adapt your business policies is not. Further, some of these changes simply aren’t black and white.
The most significant change from the new tax law impacting freelancers is the pass-through deduction that allows limited liability companies (LLCs), partnerships, S-corporations, and sole proprietors to deduct 20 percent of their business income on their Schedule C form. For instance, a business owner who earned $100,000 in 2018 might only have to pay taxes on $80,000. But the rules are complex, as the deduction varies if your considered a “service professional” and the deduction has phaseouts and additional criteria for higher earners. Tax planning might be needed to get the full benefit from this deduction.
3. Year-round advice
If this isn’t your first year freelancing, then you’re likely already familiar with the need to make quarterly tax estimates. Unlike traditional employees, there’s no tax withheld from your income, so it’s on you to make regular tax payments to the IRS. Failing to do so can result in some nasty fines. Plus, from a budgeting perspective, leaving your tax bill for one big payment in April isn’t always easy on the purse strings.
An accountant can help you stay on top of these quarterly obligations, and assist in calculating both your total estimated tax and minimum payment obligation.
Having access to an accountant year-round is valuable in many other ways too. Wondering how to best put money away to save for retirement as a freelancer? Not sure which expenses might be deductible, like those health care premiums, and don’t want to wait until the next tax season to find out? These are all questions that an accountant whose experienced in working with freelancers would be equipped to answer.
4. Your time is money
The more time you spend on taxes, the less time you have to grow your business. Employees with a steady paycheck might not lose out by taking time to do their taxes, but freelancers have to allocate their time wisely.
IRS data shows that the average taxpayer spends 11 hours annually filing their taxes, but business taxpayers specifically spend 19 hours per year. That’s the average. Many freelancers spend significantly more time than that, which makes sense if you’re hoping to seek out every last deduction.
Outsourcing to a professional tax accountant might just be a wise business decision.
5. Freelancers face a much higher chance of audit
Although the overwhelming percentage of taxpayers aren’t audited, independent contractors face a much higher likelihood. Data from 2015 shows individuals earning $100-200k face only a 0.64% chance of audit, but that risk increases about 4x to 2.5% for freelancers earning the same income.
Despite the IRS’s reputation, they’re not fools. They spend their resources auditing returns with the highest likelihood of inconsistencies. And given the amount of discretion that business owners have in claiming different deductions, it shouldn’t be a surprise that tax returns with Schedule C (where self-employment net income is reported) face higher IRS scrutiny.
All taxpayers can help protect themselves by keeping detailed records and receipts. But an audit by the IRS is never fun, especially if you’re left responding to their inquiries on their own.
Seeking out an accountant who includes audit protection as part of their services, meaning they will both stand by their work and not bill you more for doing so, can save you money (and a headache) should this be your unlucky year.
Complex taxes are a part of life for any freelancer. Seeking out a tax service that can advice you year-round, stand by you in the chance of an audit, and guide you to your biggest refund will make your chosen career path much easier. If you are interested in seeing if Visor might fill those shoes for you, create an account today and meet your tax pro.
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