Attention, self-employed pros: Putting off tax prep is not in your financial interest. So whether you’re wrapping up your payments for 2015 or you’ve cleared your slate to plan for 2016, heed these helpful tips from Michael Vaden, Principal and Director of Decosimo/Vaden certified public accounts and adviser to many Country Music industry clients.
MAKE QUARTERLY ESTIMATED TAX PAYMENTS
Freelancers, independent contractors and self-employed professionals must pay estimated taxes on their net income four times a year, with any overage or underpayment to be settled up with the IRS on April 15. Those payments must be based on a reasonable estimate of earnings calculated on income and deductions for the quarter. Failure to do so can result in a big tax bill on top of possible penalties and interest.
Even those who’ve had taxes withheld from one income source must make quarterly tax payments on any other wages from which taxes were not withheld. “It depends on what type of income you’re receiving,” said Vaden “Some tax payers receive wages from one job but also get independent contractor earnings from other sources. Even though they have some taxes withheld, they still need to pay quarterly estimates.”
A portion of your mortgage and utility bills can be deducted for a home office or studio, based on the proportion of square footage it occupies in the home. And you generally can deduct the cost of premiums for medical, dental and long-term care for yourself, your spouse and dependents. Check the IRS website for qualifying criteria.
REDUCE YOUR TAXES THROUGH SAVINGS AND INVESTMENTS
SEP accounts and IRAs can help self-employed people save for tomorrow and reduce their taxable income today. For 2014 and 2015, those who are under 50 years of age may be able to contribute up to $5,500 to a traditional or Roth individual retirement arrangement (IRA); the limit rises to $6,500 for those over 50. Contributions to a traditional IRA are generally tax deferred; you pay taxes when the money is withdrawn. Contributions to Roth IRAs are not deductible in the year they are made but not taxable when you take your money out. With both IRAs, withdrawing funds before age 59½ triggers a penalty for early withdrawal. With a SEP (Simplified Employee Pension) IRA, you can contribute up to 25 percent of your self-employment income, up to $52,000 in 2016 and $53,000 in 2017. You can make IRA contributions for the 2015 tax year at any time up to April 15, 2016 but can contribute to a SEP up until your 2015 return is timely filed.
MONEY NEVER SLEEPS
Keep an eye on your money year-round. Organize your receipts so you can find deductions come tax time. Keep documents for seven years, in case of an audit. And don’t lose out on income by failing to track invoices and checks. Vaden says he’s had many cases where the 1099 that a payor mailed a client at the end of the year did not match what the client thought he had received. This can often be rectified with a phone call, but the clients must have documentation or they may end up in the heartbreaking situation of paying taxes on money they never got.
BE AWARE OF TAX CHANGES — OR HIRE SOMEONE WHO IS
Tax law changes from year to year. For example, beginning in 2013, self-employed people began paying additional Social Security and Medicare taxes on certain types of earnings. Other changes are subtle, such as limits on itemized deductions and personal exemptions depending on income.
But think twice before purchasing tax prep software. “If you don’t know what you’re looking for, you won’t know whether your return is done correctly or not, whether you’ve put something in the wrong box or checked the wrong box,” said Vaden. “If you don’t really know your way around your return, you probably should hire a tax professional to work with you.”
By Jeannie A. Naujeck
© 2015 CMA Close Up® News Service / Country Music Association®, Inc.