Tax time is frustrating and scary for lots of people, especially if you’re self-employed or have a side-hustle—but it doesn’t have to be. We spoke to our friends over at TimberTax.co about how to prepare for tax season throughout the year so it goes smoothly.
Here are the three main scenarios and how to avoid them next year: owing money on tax day, you extended your return, and feeling frustrated.
Tax Time Problem #1: You owed at tax time
Tax Time Solution: Pay quarterly estimates
If you owed money, that may be ok. Theoretically, you got a low-interest loan from the government. The problem is if you didn’t set aside the cash to cover the payment when you filed your return or extension.
Here’s how to avoid owing, or at least avoid being surprised: pay your quarterly estimates. These are due in April, June, September and January for each quarter for both federal and state income tax. The amount you pay should be roughly based on last year to avoid late payment penalties or interest. If your income is dramatically higher or lower than the previous year, you may want to engage a tax accountant to help calculate how much to pay or expect to pay. You can tell how much you made based on your quarterly Profit & Loss report in Táve. Compare this to the prior quarter or the same quarter in the prior year. If it’s drastically different, you may want to run it by your CPA.
If your income and situation is the same from the prior year, you can use the vouchers provided in your previous year’s filing. Be sure to pay both the state and federal income tax. You may also be subject to city income tax if you live in NYC, for example.
The other issue with owing money at tax time is penalties. It’s important to remember that the income tax system in the US is a pay-as-you-go system. This means you should pay in as you earn each quarter. Not filing on time can also add penalties. Make sure you file on time or extend by the original due date in order to avoid late filing payments.
Tax Time Problem #2: You didn’t file on time
Tax Time Solution: Get organized
Did you extend your return? Generally, that’s no problem. If you have multiple K-1s or have a complicated tax return, it’s nice to get additional time to file the return. That said, if you extended because you waited until the last minute or didn’t have your files organized, then now is the time to start getting things organized for next year.
Are you staying up on your bookkeeping? Do you have a bookkeeping system? Google docs can easily get out of hand and disorganized. Consider software tools like Táve. Keeping track of income and expenses in Táve not only helps you keep on top of bookkeeping, it helps you know the financial health of your business at any time enabling you to make informed financial business decisions.
Deciding whether to hire a bookkeeper as well is another decision. Either way, do what you need to in order to stay on top of your revenues and expenses in case you need to apply for a loan, rent an office (or apartment if it’s your only source of income), or file your taxes.
Make sure you save all your bank and credit card statements too. Setting up Filethis or Hubdoc are good options. Otherwise, diligently downloading and saving in Google drive or Dropbox are ideal solutions. Táve helps with that paper trail by allowing you to upload receipts when you record your expenses.
Tax Time Problem #3: You’re confused and stressed
Tax Time Solution: Consult a professional
Being self employed, you’re probably the type of person who is quite self-reliant. When does it make sense to hire outside help? It depends on your level of comfort, but generally, you should find a CPA or tax professional when you feel frustrated or overwhelmed.
A good pro will be able to talk you through your situation and empower you to make decisions. It’s not always necessary to engage someone to file your taxes or do your books, but if you’re consistently behind or feel like you’re paying too much, it might be time to find someone you can relate to.
Just like a doctor, finding an accountant with good bedside manner is important. You should feel comfortable discussing your situation to enable you and your tax advisor to make intelligent financial plans and achieve your goals.
To review, if you owed money, filed late, or felt overwhelmed by tax time, you now have 3 ways to combat those issues. Make sure you’re paying your quarterly estimates to the IRS and your state if they have an income tax. Set up and stay on track with a system to keep your books and records organized. Find a trusted advisor, preferably a referral, who can talk you through your situation. It’s best to work with someone who has experience in your industry.
Timber Tax is a web-based tax service for freelancers with expertise working with photographers. Timber knows the ins and outs of sales tax, state tax, and federal income tax so you can stay behind the camera and in business. Book a call today for a free consultation with a CPA. Mention Táve to get 10% off your tax filing for next year.