This isn’t going to be the typical “last-minute tax tips” post. I’m not going to advise you to try to remember any business expenses you forgot about, or remind you that filing electronically could get you a faster refund. Instead, I’ve got two huge pieces of advice for freelancers and solopreneurs filing 2018 taxes—both of which could save you a lot of money.
Learn how the tax system works
Accountant Katherine Pomerantz has a comprehensive guide to the freelance tax-filing process at The Creative Independent, starting with a note on the importance of proper tax planning:
The most frustrating thing about my job is creatives who say “good enough” when it comes to taxes. Often these artists feel they are too stressed, confused, or busy for proper tax planning, but paying too much money in taxes can hurt you both personally and professionally.
As a freelancer who has definitely paid too much money in taxes in the past, I agree. One of the best things freelancers can do for their careers is to learn how the tax system works. You won’t necessarily find this stuff out from a CPA, btw; I spent a couple of years working with a CPA who never mentioned that I could reduce my tax burden by putting money into a SEP IRA, for example.
If I’d known about the SEP IRA during those years, I could have put some of the money I owed the government into the SEP instead, and gotten an “above-the-line” tax deduction—which in turn might have reduced the amount I paid in Affordable Care Act premiums, since those credits and subsidies are dependent on your “below-the-line” adjusted gross income.
So while I always advocate for working with a CPA, I’m also going to advise you to learn as much about the tax system as possible—and learn how to use it to your advantage. Especially this year, when there are all kinds of additional variables like the 20 percent qualified business income deduction.
Take the time to understand how freelance taxes work. Consider it part of your job, schedule time for tax planning into your daily and monthly workflow, and adjust your hourly wage accordingly.
Don’t be afraid to take the extension
There’s still time to take a crash course in tax planning and get everything done by April 15—start with The Creative Independent’s guide, then check out The Freelancers Union 2019 Tax Guide—but if you won’t be able to get all of that done and meet your freelance clients’ deadlines, don’t be afraid to take the tax filing extension.
If you want to file an extension on your 2018 taxes, you might be able to file the extension form for free with Free File; otherwise, you’ll need to send in one of these IRS forms (the form you choose depends on whether you’re filing as an individual or as a business). Filing this form gives you an additional six months to complete your tax return.
Be aware that filing a tax extension form does not give you an extra six months to pay your taxes. You still have to give the IRS your best estimate of the taxes you owe by April 15. Luckily, you’ve probably already done that—because you did pay your estimated taxes this year, right?
Likewise, if you’re making last-minute IRA and HSA contributions for the 2018 tax year, you still have to make them by April 15. You don’t get an additional six months to contribute to those plans. SEP IRAs are different; if you take an extension, you can make SEP contributions until the day you file your tax returns.
(Also, you’re still going to have to pay state taxes on time, unless you file a similar extension with your state. Check your state’s tax website to learn about the forms and requirements.)
Why take the tax extension, then? Because it’ll give you time to learn more about the tax system and file the kind of tax return that will be most advantageous to your freelance business. If you’re thinking about hiring a CPA—and I always advise people to hire CPAs—the extension gives you time to find one who that really understands how freelancers work (not all of them do, as I learned the hard way).
You can always request an initial consultation with a CPA to determine whether they’re a right match. Use that time to ask questions like “how many freelancers have you worked with in the past” and “what type of advice do you usually give freelancers?” Pay attention to the way they react when you describe your job; if they sound familiar with web design or web writing or whatever you do, that’s a good sign. (If they ask “what’s a blog,” that’s a bad one.)
According to the National Society of Accountants, the average CPA will charge around $176 to complete a non-itemized federal and state return; however, you’ll probably pay more than that because you’ll be setting up additional meetings to discuss tax strategy, whether it’s time to incorporate, whether you need a business license, and more. I’ve paid around $400 in the past, so don’t be surprised if you pay a little more than the average.
These two “last-minute tax tips” are, of course, actually advice to not file your taxes last-minute. When you do your taxes quickly, without considering all of the potential tax advantages available to you, you run the risk of losing money.
And, from one freelancer to another, that’s not money you can afford to lose.