As I’ve eluded to in the past, I come from a long line of CPAs. My granddad started Housholder Artman, PLLC in 1955, my dad took over the business a few decades later, and my sister and her husband now work there. In fact, even SVV was an employee of the family firm for five years prior to coming to work with me full-time in 2016! Having such a service at my disposal has been helpful, to say the least, when it comes to tax prep for this freelancer.
Around this time every year, I receive an influx of frantic messages from friends who are fellow freelance writers, bloggers and/or small business owners trying to tackle their taxes and asking what constitutes a write-off and do they really need a CPA. If I didn’t have the tools at my disposal that I do, I’d be completely in the dark, as well (and often am anyway!), so I consulted my CPA sister Kari and her husband Josh Clarey, to answer some FAQs they (and I) receive.
Let’s talk tax prep for freelancers. As an accountant, how do you recommend a client organize their material before bringing it to you?
If they’re not going to be in QuickBooks, organize your expenses in an Excel spreadsheet by category that you see on the Schedule C. I try to give our Schedule C clients the organizer that breaks out what your expense categories can be—that way they can group it all themselves, and I don’t have to do the sifting. That saves them a lot of money, too, because when your CPA has to go through and figure out what expense goes with what, that’s just adding to the time required to accurately file your tax obligation to the federal government. Some people will just give me their 1099s and a grocery bag of receipts, and then I have to go through and figure all that stuff out, which winds up costing them a lot of money.
The organization of expenses is what’s most important. It saves me time and the client money.
Figuring Out Deductions & Write-Offs
What are some expenses a small business owner might be able to write off?
Definitely the business use of home if they don’t have the accessibility to an office. For example, if you work for a newspaper and they have an office for you downtown, you can’t write off your business use of home because you have an office available to you. But if you’re using a specific part of your home for your office, you can take an expense that is based on the square footage of that compared to the whole house. You can also deduct utilities that directly affect the office, like Internet and energy use.
What are some things that business owners try to write off but can’t?
Yard maintenance, pet care, groceries for meals, that kind of stuff. There is some nuance in the rules so it’s best to ask your accountant if you have a question.
Speaking of which, I do a lot of restaurant reviewing for magazines and my blog—if I’m footing the bill, can I write the entire thing off?
You can only take 50 percent of all meals. Some people put all of it in there not knowing they can only deduct half of it.
Are there any other expenses that are a percentage and not dollar-for-dollar?
Mileage. That changes each year. Right now, it’s at 54.5 cents, down from 58. Some companies will only reimburse you, say, 20 cents a mile; in that case, you claim the difference on your taxes. (Editor’s note: You can always check the most up-to-date standard mileage rate on the IRS website.)
Some people don’t realize that if you take mileage, you can’t expense any actual work on your car, whether oil changes or car washes, new tires or gas. It’s either expenses or mileage. Mileage is usually the most beneficial method to deduct vehicle expenses, however.
We’ve also seen people go on work trips for, say, two days, then they stay over for a week and think they can expense the whole thing. If you were audited, and the IRS found out you were only training for two days but expensing six, you’d have to pay some of the tax back, as well as penalties and interest.
What about a freelancer who has a lot of 1099s, is it smarter to set yourself up as an S Corp or an LLC?
Our first question to a client that wants to set their business up as an LLC or S Corp is “do you need the liability coverage?” If so, you would go with an LLC. If not, an S Corp may be more beneficial to your business. Tennessee’s fees vary depending on the number of members and corporate structure.
And it’s also not a way to avoid self-employment tax, which is the real money suck.
Right. Because you’re still reporting your K1 on your 1040 as a pass-through income source. It’s still going to go to Schedule SE on your tax return to figure what your self-employment tax will be.
Paying Quarterly Taxes
Someone whose income fluctuates like mine—how would you tackle paying into quarterly taxes?
Every time you get paid, immediately put 30 percent away into a savings account for your taxes to cover your self-employment tax and the actual income tax that you will owe. Most people that I deal with have a business account and once they receive money, they just transfer that over to a savings account, that way when the quarterly estimates are due, they have the funds available to pay them. Your accountant should be able to help you come up with quarterly estimated payments for the year.
You see a lot of people who fail to pay their estimated quarterly taxes, right?
Yes, they don’t pay their estimated taxes, and because you didn’t pay estimated taxes throughout the year there are penalties and interest associated with that—assuming you owe over $1,000.
If you owe $5,000 or less, it’s probably not going to be that big of a penalty. But if you get into owing $10,000 or $20,000, it’s a substantial amount of money in interest and penalties.
That’s the hard part for people with fluctuating income to figure out because they don’t know if they’re going to have a good year or a bad year, but I think it’s important to always pay something in [each quarter]—if you think you will owe tax at the end of the year.
What if I owe $15,000 one quarter and only pay $10,000 in at that time. Do I still get penalized?
It depends on what your final tax liability winds up being, because they don’t know when you technically earned that income. They figure out what your final tax liability is and allocate that over the four quarters of what you should have paid. Anything is better than nothing.
And only accruing penalties and interest for a quarter is nothing compared to those who don’t pay anything in throughout the year.
Is there a way to set up automatic quarterly payments for June 15, September 15 and January 15?
Yes, you can. When we prepare your return, we will also help you set up your quarterly estimates for the up coming year. If you file past the first estimated deadline, then we just break it up over three payments instead of four. Some of our clients use the automatic estimated payments, which we can set up in our system, but then the hard thing in doing that is you have to make sure you have the money in the account at the time of the withdrawals. Sometimes it’s easier just to do the vouchers, because if you don’t wind up wanting to pay in what we originally allotted for that quarter based on income flow, then it is easier to change.
When to Hire an Accountant
Why should someone hire a CPA versus using, say, TurboTax?
Because online or software-based tax services can’t help you figure out all the deductions you could actually be getting.
If you’re just a W2 employee, taking the standard deduction and are not itemizing, you don’t really need an accountant or a CPA firm to do your taxes. But if you have a business and especially if you are itemizing, then software doesn’t really catch everything.
A lot of freelancers we’ve seen trying to do their own taxes who also have, say side-hustle room rentals, and are filing Schedule E, as well as Schedule C, have had a hard time trying to complete these properly with the available tax software. Many of them require amendments to correct the discrepancy.
For certain cities like NYC, would you need a local CPA who specializes in NYC tax to do your taxes or could you as a TN CPA handle it?
We can do tax returns in any state. It’s more difficult to handle the taxes for those living overseas.
Getting Audited by the IRS
What are things that could get you flagged for an audit?
I think taxpayers think there are a lot of things that flag the IRS, but realistically, there aren’t as many as people think. For example, if they don’t see a lot of income for multiple years but a lot of travel expenses, they might question that…
Technically, if you’re taking a mileage deduction or expensing things for your business, the government wants a log or record that backs the data up. (Editor’s Note: I use a hand-written log, but there are a ton of apps like MileIQ that will track mileage for you.)
Things That Annoy CPAs
What’s the hardest thing to convey to clients as an accountant?
How important estimated taxes are if you don’t have withholdings on your income.
And then I assume they think you should be able to get their taxes owed down when they actually haven’t paid anything in?
People don’t realize that their income went up from the year before or their expenses went down. We always point those things out to them and try to help them figure out why they’re reporting more income than they think they should be. But sometimes, it just is what it is and there’s not any magic we can do to fix the fact that you’re running a successful freelance career.
With the healthcare the way it’s been the last few years, we saw a lot of people get penalized for not having a certain amount of coverage. And everybody thinks it’s our fault!