Let’s Just Get This Over With

“Few of us ever test our powers of deduction, except when filling out an income tax form.”
– Laurence J. Peter, author

In This Issue:

Let’s Just Get This Over With

by Monica Day

I’m going to talk taxes. In six weeks, we file. Or maybe we extend. Either way, it’s time to deal with them – so let’s just get it over with in one column, shall we? I’ll try to make it as quick and painless as possible. But I’m also going to save you a boatload of money. So buckle in.

Just so you know where I stand: I hate taxes. No two ways about it. From the purely bureaucratic nature of the forms and the nitpicky recordkeeping it entails. To the larger issues of funding political conundrums I don’t agree with…or a school system that offers little value to my children. It’s a loathing complicated only by my gratitude for the nuts and bolts transportation, garbage collection and practical matters that make my life work.

The irony that I live in one of the highest-taxing cities in the country – Philadelphia – is not lost on me. I have always appreciated the finely-honed sense of humor of the Universe.

But I have learned – the hard way – that resistance is futile. Not that I’ve been a placard-carrying tax resistor, mind you. But I resist in passive ways. I file extensions…I don’t put aside adequate money throughout the year…and you could not pay me enough to date an IRS agent (well, unless it would result in a significantly lower tax bill…on second thought…not even then…).

So for someone like me, being a freelance copywriter – and self-employed – is a mixed blessing.

On the down side, I must think about tax issues far more than I’d like. Every receipt must be kept and marked “business” or “personal.” I must keep meticulous records of my income and expenses. I must measure the space I use in my home and make some strange calculations about how much I can “write off” for the office space I rent to myself. Occasionally, I envy the paycheck method of tax collection – it seems more humane sometimes to me.

But the upside is also substantial. Many of my day-to-day expenses can be legitimately counted as business expenses. Most of my travel and vacation expenses – deducted. Gifts to my clients and associates, books I would read anyway, magazine subscriptions I maintain for research – as long as they are reasonable – are all deductible. Plus, there are more powerful retirement-saving vehicles for the self-employed. The list goes on and on.

The best way to keep your focus on the upside list – and not get walloped by a big tax bill from an item on the downside list – is to get help. I have come to worship people who can help me make it through this annual genuflection to our government. And I have discovered – through plenty of trial-and-error – that every dollar I spend on tax and bookkeeping assistance is returned to me five-fold in either saved taxes…or increased work productivity.

So if you’re going to make even $3,000 or more in a freelance endeavor this year, and you’ve generally done your own taxes in the past, make this the year you hire an accountant. I stopped preparing my own taxes the year I started my freelance business… and I’ve never looked back. Most accountants do an audit of your prior year’s taxes…and mine found enough money in there to pay for his services twice over! So I was in the black before he even got started on the tax returns due.

Second – do a little research. (We’re writers – we research for our clients all the time – unleash the power of this skill on your own behalf!) On more than one occasion I uncovered a write-off specific to freelance writing that my accountant wasn’t aware of – and saved myself a few more dollars.

Third – do a little pre-planning. Are you transitioning from a salary to freelance? Do you have a spouse whose paycheck will pick up most of the taxes…and your business will simply offset their income with tax-reducing write-offs? If you understand how working for yourself will alter your taxes in advance, you’ll keep better records from the beginning and empower your accountant to shave as much taxable income off as possible (and legal!).

Finally – can’t seem to harp on this enough these days – be organized throughout the year. Preparing to surrender your records to your accountant at tax time shouldn’t take you any more than 2-3 hours if you took a few minutes each week to keep your records in good order. And paying for your taxes should be as simple as writing a check to cover the balance.

It’s easy to overlook these nuances in your first few years in business…but you’ll pay for it. Trust me, paying taxes out of your pocket…rather than having it simply “go missing” from your paycheck, can negatively effect your motivation and drive. So guard yourself from tax depression for the next six weeks…and empower yourself to be a paragon of tax-efficient planning the rest of the year…and you’ll never have to dread April 15th again.

Resource Referral: Outsmart The Tax Man In An Hour

My travel-writing buddies really have a handle on this tax stuff. In fact, travel writing is one of the most tax-effective activities I perform each year.

Recently, Jen Stevens interviewed tax guru Eric Taylor, a CPA specializing in taxation and business development. Eric spent an hour talking about Smart Money-Saving Tax Strategies for Freelancers, and they got every word on tape.

And here’s the kicker…sign up to listen in and you’ll get a copy of “The Writer’s Tax Guide," (normally $24.50) for free.

You’ve only got six weeks to get your act together to file your 2006 taxes. Burying your head in the sand won’t make the task go away – and it certainly won’t save you money. You think credit card companies charge a lot in interest and penalties? Well, where do you think they learned that little trick…right…the IRS!

Discover dozens of simple strategies that can save you thousands of dollars a year. Sign up for this teleconference recording and let Eric and Jen put you on the right track…and then enjoy the freebie Tax Guide that comes with it. It’s a no-brainer in my book.

Quick Tax Tip: How to Protect Yourself from an Audit

As a freelancer, your risk of an IRS audit is up to 10 times higher than it was when you were someone’s employee. But don’t panic! Your chances of an audit remain very slim. And as long as you’re not taking enormous deductions against a modest income (deducting way more than you’re bringing in), in all likelihood, the IRS isn’t going to come calling.

Nevertheless, you should keep certain documents on hand so you’ll be prepared should you be audited: a copy of your return with 1099’s, bank and brokerage statements, receipts or other proof of payment of business expenses, and records justifying your deduction for a home office.

The IRS can audit you any time within three years after your filing (this period can be extended to six years if you’ve understated income by 25% or more and indefinitely if you don’t file). Don’t discard any records until you’ve checked your state’s laws. Some states can audit your state tax returns for longer than three years… and you’ll need all the same records on the state level as on the federal.

Source: The Writer’s Tax Guide: A Money-saving Manual for Travel Writers and Other Freelancers by Eric Taylor, CPA