For some self-employed creative professionals
(or part-time “moonlighting” creatives), tax season can be the equivalent of a
nightmare…especially if they haven’t kept their accounting documentation and
tax receipts up-to-date and organized throughout the year, but much like any
serious project—creative or otherwise—once you master a few key techniques you
are more likely to enjoy (or at least have a higher tolerance for) the process.
With this in mind, the tax experts at CPA for Freelancers® offer these
Be Proactive. Even though Tax Day is a
few days later this year (April 18, to be exact), there are several
reasons to file your taxes as soon as you can, especially if you are owed a
refund. At the beginning of the season, the volume of tax returns going into
the IRS is lower, so they can turn around refunds more quickly. The same is
true for tax professionals: The closer it gets to April 18, the busier CPAs
get, so set and appointment and keep it. Even if you owe taxes, you can file
early and not pay until April 18.
geographic tax obligations. The most common place for newly self-employed
individuals to overlook their tax obligations is at the local tax level.
Business owners need to know what taxes they may be responsible for in the city
where they are conducting business. This information can usually be found on
the website of the city where a freelance business is based or by engaging a
local CPA firm to help in the business start-up phase. A tax professional will
be able to advise on geographic-specific tax considerations that may not be
apparent to those outside the tax profession.
Sort receipts before you go. Don’t walk
into your tax appointment with a shoe box of crumpled receipts and expect fast
service. If you keep your business records organized throughout the year, they
will be much easier to go through come tax time, which can help you avoid
errors and missed business expenses.
Don’t forget—you can file an extension.
If you don’t have all of your tax documents and the calendar says April 18 is
coming, you still need to let the IRS know you intend to file. Your CPA can get
an automatic extension of six months to file your taxes, but you still need to
pay your estimated tax debt by April 18 or you will face fines.
Own up to any tax indiscretions. Your
tax preparer can only file a return based on the facts and documents you
provide. He or she doesn’t want you to guess about expenses or income, and
lying about those details is a surefire way to get in serious trouble with the
your entity options. If you are a self-employed creative, or
are considering starting your own business, tax season is a good time to ask
your tax advisor what entity type would be most advantageous for you. For
A sole proprietorship
is the simplest form of entity in terms of set-up and tax payments. As a sole
proprietor you are responsible for claiming the profit and loss of the business
as your income. You also must pay self-employment taxes. The drawback of a sole
proprietorship is that the individual is personally liable for any damages or
credit issues that arise from their business operations.
A corporation is
an entity which is separate from its owner. The corporation is formed under the
laws of the state in which it is operating, with Articles of Incorporation. Choosing to
establish a business as a corporation limits the liability of the individuals
participating in it and, from a branding perspective, it may also provide
additional credibility to the business.
corporation (or s-corp) is a corporation and the owners are considered
employees. The entity is required to pay these employees a reasonable salary.
Profit or losses of the entity flow through to the individual shareholders. Any
salary paid is subject to traditional employer and employee payroll taxes. The
remaining profit flows through to individual shareholders and, while subject to
income tax, is not subject to payroll taxes and is considered passive income.
In order to maximize the tax benefit of an s-corp, owners must find the balance
between wages and profit distribution.
A limited liability
company (LLC) is not a corporation, but it has the liability protection of
a corporation. Single-member LLC entities pay tax like a sole proprietorship.
Multiple-member LLCs can also be formed which pay taxes like a partnership.
Look past Tax Day. Once your taxes are
filed, resist the temptation to stuff your tax receipts and other supporting
documents in a drawer and forget about taxes until next year. Instead, set a
calendar reminder to make a tax planning appointment later in the year with
While it may not be as much fun as your next
creative project, spending a little time upfront organizing your tax
documentation and engaging the help of a good tax preparer who understands your
needs as a self-employed or freelance creative is time well spent. Doing so
will give you more control over the tax filing process, expedite any tax refund
you are owed and create a tax situation that more closely resembles a
masterpiece than a menagerie of messy (and potentially costly) taxation issues.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues
for freelancers and self-employed individuals across the country. He offers a
free monthly email newsletter covering tax, accounting and business issues to
freelancers on his website, www.cpaforfreelancers.com which also features a blog, how-to articles,
and a comprehensive freelance tax guide.