Whether you’re an employee, a moonlighting 9-to-5er or a full-time freelancer like me, tax season can be, well, taxing. That’s especially true for the latter two groups, as there are multiple income streams to report, additional tax forms to fill out and special rules to follow.
That doesn’t mean we’re doomed to make mistakes, though. Knowing what tax traps side giggers fall into can help us avoid them. Here are five of the costliest.
1. Not Reporting All Income
The IRS doesn’t care whether our paychecks come from full-time jobs, investments or side gigs. Income is income—and they expect a cut.
“If your net earnings are $400 or more, you need to file, even if you don’t get a 1099,” says Certified Public Accountant Lisa Greene-Lewis, a tax expert for TurboTax. “Honestly, it’s best to claim any money you earn.” Otherwise, the IRS could slap you with a 20-percent underpayment penalty and interest.
I’ve found that using a basic spreadsheet to keep tabs on which clients owe me what, along with yearly earnings, takes some pressure off come spring.
2. Botching Quarterly Payments
State and federal taxes, Social Security and Medicare are automatically deducted from regular employees’ paychecks throughout the year. Not so for us self-employed people, who have to estimate—and pay—our taxes every quarter.
“How much depends on things like expected income, as well as any deductions and credits you may be eligible for,” says Greene-Lewis. I keep my numbers straight by setting aside money from every paycheck until it’s time to make a quick online payment.
Rather pay it all in April? It’ll cost you. “Generally, if you owe $1,000 or more you would pay about 3-percent interest on the underpayment,” Greene-Lewis warns.
3. Missing Out on Deductions
“If you have a side business, there are so many deductions out there that people don’t know about,” says Greene-Lewis. “In some cases, [claiming them can] even bump you down to a lower tax bracket.”
For example, if you work in a home office, you might be able to deduct a portion of your mortgage interest, property taxes and utilities, based on how much of your home is used for business.
4. Overstating Deductions
The rule of thumb is that a deductible expense must be “ordinary and necessary” to the business. In other words, a hotel room during a business trip would count—but stay a few extra days for vacation, and those expenses are off the table.
If you’re on the fence about a deduction, ask a pro. Breaking this rule could result in interest and penalties.
5. Not Properly Vetting a Tax Preparer
While confident side hustlers can certainly DIY their taxes with software, I’ve opted to work with a CPA who specializes in self-employment. It costs a few hundred bucks, but the peace of mind is worth it.
Just make sure your pro knows his stuff. Back in 2015, I went to a popular storefront tax preparer who didn’t know the ins and outs of freelancing. After following his advice regarding my estimated tax payments, I was later hit with a huge tax bill and a penalty fee for underpaying.
March 3, 2017