If you’re reading this on April 15, as you desperately try to file your taxes just before the deadline, well, it’s too late for this year. But the good news is it’s not too soon to start preparing for a less stressful income tax time next year. (Cold comfort, I know.)
Working at home–either as an employee or self-employed individual–complicates your taxes and definitely causes more stress. In fact, if you’re an independent contractor, you may well have the added task of sending in the first of your quarterly estimated tax payments for the current year’s taxes along with any taxes owed from last year.
However, the tips outlined here are things that everyone can use at income tax time.
Forget About Income Tax Time
The first thing you need to do is stop thinking about “income tax time” at all.
No, you don’t get to put your head in the sand. Instead make organizing taxes an all-year task–not a springtime chore.
One of the benefits of being employed is your employer makes this easier for you by sending off a portion of your pay to federal, state and local tax authorities for you (not to mention paying half your Social Security and Medicare taxes!). However, the self-employed have many things to track all year:
- Quarterly estimated tax payments will keep you thinking about taxes at least four times a year. You also have to pay all of the Social Security and Medicare taxes through the self-employment tax, which is paid when you file your income taxes. So, make sure you are sending in enough in your estimated tax payments to cover both.
- Accurate income records are essential. Though any client who paid you more than $600 in a year should send a 1099-Misc detailing their payments, mistakes do happen and sometimes you will need to get a 1099 corrected. Plus, you still have to pay tax on that income less than $600 for which you didn’t receive a 1099.
- Business expense receipts are even more important for you to to organize because no one sends you a tax form on these. One of the benefits of being self-employed is that you can deduct your business expenses, including a lot of home expenses if you have a deductible home office. However, you need receipts to back that up, so all year long you should be saving and organizing those receipts. This goes too for those who aren’t self-employed because you have deductions too. Filing receipts for charitable gifts, property taxes, mortgage expenses, medical expenses, etc., all year will make income tax time so much less stressful.
For more, see The Independent Contractor’s Tax Guide.
Keep Learning
Just as we collect tax documentation all year, we make tax decisions all year long–not just at income tax time. To make informed decisions regarding your home business and/or personal finances, keep educated about new tax laws, or learn about the old ones. Even if you have an tax accountant, you will not likely call on him or her for every financial decision.
For instance, if a new opportunity comes along you may need to weigh whether self-employment or employment is better from a tax point of view. Knowing which home-related expenses are indirect expenses for your home office, which are partially deductible, may affect decisions regarding them.
For more, see this collection of tax resources Taxes & Telecommuting.
Use Tax Software
If you plan to do your taxes yourself, get a good tax software program. It will likely pay for itself. This isn’t just because it is a lot easier than filling in all those formsorbecause you can file electronically and get your rebate soonerorbecause it negates the possibility of math errors. Although, those are good reasons! The way it saves money is through the interview interface that most tax software programs have. This helps you find deductions and money-saving opportunities that you might have missed by paging through endless numbers of instruction booklets.
For more, read these Reviews of Tax Software.
Start Early (Even If You Don’t Finish Early)
Giving your taxes a quick run-through at the beginning of February (right after you should have received all your tax documents) can help you plan for the coming year as well as estimate what you are likely to owe or get back. I sometimes do it even earlier, using my own records to calculate income, which I then double-check against my 1099s when they arrive. For the employed, you can use your last paycheck of the year (assuming you’ve only had one employer) to make a good guess on what will be your W-2.
This can head off problems. Say you withheld too little taxes and owed a lot, if you don’t discover this until April, you’ve likely made the same mistake again for the first quarter of the current year. You will also discover if you are missing receipts or there’s been a mistake on a tax form, giving you time to correct the error. It may also tell you when to file. If you owe money, it probably pays to file your taxes closer to the deadline. If you don’t, get your money back sooner!
Have the Money to Pay What You Owe
Planning for taxes is a lot more than simply organizing your receipts. As anyone who has ever had the pleasure of paying estimated taxes knows, it’s not the writing of the check four times a year that is difficult; it’s having the money to pay them. When a payment comes in, it is up to you to be sure to save enough of it to pay the taxes you owe on it.
When you file your income taxes, you may calculate your estimated tax payment for the current year based on the previous year’s tax liability. And that may work fine for you most years. But when your income or deductions change then so so your taxes. And it could result in a penalty. It’s a good idea to review your income every quarter before you send that payment. Likewise, if you are employed and were hit with a large tax bill, make sure you readjust your current year’s withholding, by submitting a new W-4, to prevent it next April.
For more, see these Tips for Saving for Taxes.