You guys!! I teased this two-part series on Instagram and so many of you were SO excited. Excited! About taxes! Ha! I think as a freelancer or entrepreneur, taxes at first can seem like “the great unknown.” It’s not something we’re really taught about in school and then add being self-employed on top and there’s so many questions, what-ifs and variables. I partnered with TurboTax today to help shed light on some of those!
For those who aren’t familiar, TurboTax introduced TurboTax Self-Employed last year and now this year TurboTax Live. TurboTax Live can give the best of both worlds! It allows you to easily file your taxes online with TurboTax technology and also gives you live access to a TurboTax CPA or EA for personalized tax advice and a review of your return, all from the comfort of your couch.. They can even sign and file for you, and it’s all done through one-way video, so you can file on your own time, on-demand. This can be a GREAT money-saving tool for entrepreneurs who don’t have the funds to hire a tax professional or even the time to go to a tax store, but want personalized, one-on-one guidance.
Today, I’m sharing a conversation I had with one of their tax experts. I had asked for your top tax questions and asked her to help answer the most common ones. You’ll also see a bit about how we do things at Studio DIY weaved in there so you can get some context on how we handle things around these parts. You’ll also see a bit about how buying a home factors in, as this was a big change for me this year and one that I know several of you are experiencing or will soon experience. Ready!?
Kelly: Let’s start at the beginning, if someone is filing for the first time as a self-employed individual this year, what is the first step they should take when preparing their taxes?
TurboTax Expert: Receipts for business-related expenses, payments you received from clients, and other paperwork are needed to complete your taxes. Make sure to keep everything organized so when tax time rolls around you have it all compiled and ready when you sit down to do your taxes.
If your tax bill for 2017 is more than $1,000 AND you expect to continue freelancing in 2018, the IRS will expect you to start paying your taxes quarterly rather than yearly because you are not having taxes withheld on a regular basis like you would do through an employer (Social Security, Medicare, FICA, etc). Be prepared for quarterly tax filings by getting all of your documents together now.
K: Quarterly taxes! Can you explain what they are? I remember not being aware of them when I first started my business and having to pay a penalty. Can you explain any consequences for not paying quarterly taxes?
TT: Estimated Quarterly taxes are taxes self-employed taxpayers pay four times a year (in April, June, September, and January) if you expect to owe $1,000 or more. Since the United States works off the principle of “pay as you go”, and self-employed don’t have taxes withheld like a taxpayer who has an employer you should make quarterly estimated tax payments., If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
There are ways to avoid a penalty even if you underpay your obligation. The government knows you can’t predict the future with absolute certainty, especially when you’re self-employed, so they give you some leeway.
Generally, if you owe less than $1,000, you do not have to pay quarterly estimated tax payments and will not see an estimated tax penalty. If you pay at least 90% of your tax obligation or 100% of the tax owed in the prior year (whichever is smaller), then you will not be penalized. If you are a high-income taxpayer, with Adjusted Gross Income of over $150,000, then the 100% is increased to 110%.
Finally, if none of those are true, you can request a waiver of the penalty under two conditions:
- You failed to make a required payment because of a “casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty”, or
- You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.
You may also be able to avoid estimated tax penalties if you can use the annualized installment method at tax-time to reflect your fluctuating income and avoid estimated tax penalties.
K: Tell me more about the annualized installment method. My income does not come in steadily throughout the year, I have high seasons and low seasons. How would you recommend someone budget for quarterly taxes so they are prepared for the following year? Is the annualized installment method something I should look into?
TT: If you’re like most self-employed business owners, you may see slow months and then big boosts in others. However, if you do not receive income evenly throughout the year, your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.
The annualized method determines your estimated tax liability as your income accumulates throughout the year instead of dividing your entire year’s estimated tax liability by four as if your income was earned evenly. So, if your income is concentrated, for example, in the fourth quarter of the year you may be able to annualize your income. TurboTax Self-Employed guides you through the annualized installment method at tax-time.
If your business is growing, the simplest way is to take your tax obligation from last year and make four equal payments that total slightly more than that amount. If you are a high-income taxpayer, make that four equal payments that total slightly more than 110%.
If you underpay your estimated taxes but do not have to pay a penalty, you can still pay the difference in April when you file your tax return.
K: PHEW! Ok, let’s talk write-offs. What can and can’t someone write off for their business? For example, if I purchase clothes for a photo shoot, can I write those off? If I run a social media business, can I write off my cell phone bill?
TT: Expenses directly related to your business are deductible: office supplies, cost of goods sold, advertising and promotion, dues and subscriptions, licenses and permits, equipment, auto expenses, insurance costs, utilities, and telephone, etc. Business travel is also deductible, along with 50% of business meals.
If you purchase clothes for a photo shoot that can be worn outside of the shoot, they would not be tax deductible. Someone that has to purchase a uniform for business, on the other hand, would be able to deduct the uniform.
Your internet connection and cell phone are usually critical to the operation of your business and represent valid business expenses. You can deduct the cost of the use of both internet and cell phones based on the percentage of business use that it is dedicated to.
K: What is an easy write-off that most people overlook?
TT: If you bought a desktop computer, laptop, new monitor, iPad, or any other piece of technology to help grow your business, it may be deductible as long as the device is used strictly for business purposes.
K: If someone uses their car for business purposes, are there any write offs or deductions they can take as a result?
TT: There are! Here are a few things to be aware of:
- The travel must be specifically for business. If you are trying to deduct out-of-town business expenses, the travel must be directly related to the business you are conducting.
- The business purpose must be specific and documented. Keep records indicating the specific purpose of the travel – i.e., the client’s name, and why it was necessary to be conducted at that specific location. You’ll also need to document your meetings, including who you met with and how frequently. Remember that the more information you record, the better.
- Travel expenses will have to pass the “reasonableness test.” Business travel expenses need to be a reasonable amount, ordinary and necessary, not extravagant – meaning that it has to be helpful to your business. Documenting the specific business purpose is even more important when the location happens in recognized resorts like beaches, ski resorts, and other popular vacation spots.
- You can take the standard mileage allowance (of 53.5 cents per mile for 2017) for the use of your car associated with business travel, and tolls and parking fees paid can be deducted as well.
K: Buying a home can look different for someone who is self-employed. Are there any tips you can give regarding my tax filings to ensure I’m in the best position to pursue buying a home?
TT: Absolutely! Here are a few things to keep in mind:
- Make sure you state the accurate amount of income from your business so that lenders have an accurate picture of your finances when you apply for a home loan.
- Lenders will want to look at the last two years tax returns and will look at your net income so you may want to reconsider how many business deductions you’re taking if it reduces your income too much. It may help tax wise but if you want your dream home you may want to reduce your deductions to show a bigger net income.
- Take into account fluctuations in business when figuring out what you can afford.
K: And speaking of buying a home, if someone works out of their home, can they write off any home expenses?
TT: Working from the comfort of your own home can help you maximize your write-offs. If you regularly, and exclusively, use a home office for the purpose of your business, you can claim tax deductions on that space.
Expenses that may be deducted include a portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, and repairs based on the square footage of your home used for your business.
K: Now that we know what can and can’t be considered a business expense or write-off, how should someone track these expenses for an easy filing experience?
TT: With TurboTax Live and Turbo Tax Self-Employed, you also get a subscription for a year to QuickBooks Self-Employed. This has great features like mileage tracking, receipt capture and expense finder that helps you track and separate business and personal expenses all year round, then easily export your information directly to TurboTax Self-Employed to make tax time simple and get the refund you deserve.
K: We use QuickBooks to track our income and expenses and it’s incredibly helpful to see everything in one place. We also have a separate business bank account and credit card, so that my personal expenses don’t mix with the business expenses at all. That helps too!
Regarding expense tracking, is there anything additional someone should know or have prepared in the event that they are audited?
TT: If you are claiming business meals, document the purpose of the meal, who you met with, and the date. The same applies to travel for business. Document the business purpose of your travel and date. Regarding mileage, you should also document the date of travel, purpose, and miles traveled. QuickBooks Self-Employed will help you easily track your mileage year round.
K: Is there a tax benefit to incorporating versus filing as a sole-proprietor? For example, Studio DIY is an LLC. This limits my personal liability should we ever experience a loss or lawsuit. But we are taxed as an S-Corp. That’s allowed me, the owner, to separate my personal income (the salary I pay myself) from the net profit of the business, therefore limiting my personal tax liability. But… I’m no expert, can you explain a little more about how this works?
TT: Many small businesses are unincorporated, and if the business loses money, those losses can be used to offset other income. If you need the limited liability benefits of a more formal structure you can organize your business as a limited liability company (LLC), partnership or S corporation.
There are tax advantages to being taxed as a S-Corp over an LLC. S-Corps pay self-employment taxes only on the salary they pay themselves. Compared to an LLC, in which the LLCs’ entire net income is subject to 15.3 self-employment tax.
So there you have it!! How do you feel!? A little clarity and relief, I hope!? To get started now on preparing for 2017 tax filings, you can head here and go online at TurboTax and sign into TurboTax Live! In part two, I’ll be sharing some tips that my team and I learned from working to file our 2017 taxes, where we’ve been able to save and how we plan to be even better prepared next year. Stay tuned!
This post was created in partnership with TurboTax. All content and opinions are that of my own! Thank you for supporting the sponsors that keep the Studio DIY party going! Read more about my editorial policies here.
This is a sponsored conversation written by me on behalf of TurboTax. The opinions and text are all mine.