Open Thread: How Are You Handling Your Taxes This Year?
Posted January 31, 2010 in Accounting/Bookkeeping, Open Thread
It’s nearly tax time in the U.S. and that means decision time for many freelancers. It’s time to decide how to handle income tax preparation.
Freelancers have several options when it comes to income tax preparation. They can:
- Do it themselves
- Use tax software
- Hire a professional such as an accountant or bookkeeper
Of course, each choice has its advantages and its disadvantages.
If you prepare your income taxes yourself, you won’t have to pay an accountant. However, you might also miss out on some of the deductions and tax changes that an accountant would know about. Depending on your circumstances, it can also take a considerable amount of time to complete the tax forms.
If you use tax software to complete your income taxes, you’ll be joining a large group who depend upon these handy tools. However, there is a cost associated with purchasing tax software. The more complex your situation, the more money you’ll likely need to spend on tax software.
Using a tax professional is the most expensive option, however, in some situations it could be the best. Your tax accountant can customize your return to include the details of your specific situation. Also, you don’t need to spend hours of your own time (hours that you could use on paying projects) doing your taxes.
Have you made a decision about income taxes yet?
How Are You Handling Your Taxes This Year?
Share your ideas and thoughts in the comments.
Image by consumerist
Related posts:
- Open Thread: Is Your Freelance Business Incorporated?
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- Open Thread: How Do You Deal With the Paperwork? (Administrative Stuff)
- Open Thread: How Do You Handle Phone Calls?
- Save Money on Taxes by Deducting Your Office Expenses
About the author: Laura Spencer is a freelance writer from North Central Texas with over 20 years of professional business writing experience. If you liked this post, then you may also enjoy Laura’s blog about her freelance writing experiences, WritingThoughts. Laura is also on Google+.
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36 Comments
Don Rogers @creativelydone
January 31st, 2010 at 12:43 pmUsed Tax software in the past, but thinking professional this year.
Kristina
January 31st, 2010 at 1:52 pmThis year (my first with freelancing as my only income) I used an online tax software. Next year I’d like to do them myself, but I’ll wait to see how this year goes.
Nicole Foster
January 31st, 2010 at 2:07 pmLuckily, I don’t have to do taxes since I neither make enough money nor am I the age. Nonetheless, I would probably use a tax software or a professional.
Lucian
January 31st, 2010 at 2:18 pmHire an accountant of course. For $200-$300 it doesn’t worth the headache and you might not get the taxes properly.
John (Human3rror)
January 31st, 2010 at 2:19 pmTrying TurboTax this year.
Doktor Thomas
January 31st, 2010 at 2:38 pmMany independent business persons only consider tax preparation and planning at tax time. Unfortunately that is like deciding you need sprinkler systems as the flames roar up. Right now is the night before next year’s reporting (of this year’s income). That should be your focus as last year’s business is already history.
DYI is the least expensive method, but you should have a general understanding of tax law and as much time as it takes to fully research each potential benefit/deduction. If you have the desire, patience and time, this is the route for the penny pincher. When I was younger and my time had less value than now, I started out with this method. Note also that “the system” and “the rules” were somewhat simpler.
The tax programs are great little devices with lots hints, but unless you understand what each window and question is really asking, the fill-in responses one makes is likely less-than-the-whole-answer. And, the tax program has no way of knowing that. Garbage in, garbage out.
Accountancy is NOT tax preparation. Tax prep is a small element at most. At most firms (not solo practices), underlings do the tax paperwork not accountants despite what BS you may be fed. Accountancy is what accountants do (way more complicated and diverse than form filling). If you do not understand what that means, then you don’t need an accountant. So why have him/her have their secretary or clerk (or in the case of H R Block, 2 week class attendee) do your paperwork and get over-charged? You get the accountant billing rate like the accountant did it.
Point is, if you are seeing an accountant now about organization, structure and planning, it should be about next year’s filing, not this year’s. Guess what? They don’t have time for that right now!!
Beware: nothing magical happens simply because an accountant put the numbers on the page. (Accountants have about 26% error rate, by the way; whereas individuals who do their own about 10%. Sorry I lost the site source. I suspect individuals also under report deductions resulting in over payment. Which the IRS says is about 19% of the amount paid.)
They (accountants) are not responsible for anything except math errors. Since they are using the same tax software you will use, a math error is unlikely because computers add and subtract accurately. So unless you are doing something huge (buying a business, selling a business, set up retirement plans) that requires attested to financials, cash flows and projections, P&L statements, etc., there is no advantage to using an accountant for tax reporting. There might even be disadvantages to relying on them for the cash cow filling in the blanks on federal tax forms is for their staff. And their national error rate.
There is no excuse for not knowing, not understanding your tax situation. For business (which free lancers are in, business, right?), there are a set number of deductions (that is why software can do part of the job) and a variety of income types. Hence, income totals minus allowable deductions equal the net taxed amount. Without knowing the numbers, you already over paid. (It is all about understanding the written and unwritten rules and how they work that makes all the difference.) Yes, overpaid.
The key is structure and planning. That is not in the IRS regs, not on the tax forms, not taught in law school, and seldom understood (or purposely ignored) by CPAs. Management accountants (found within corporations or in large national firms) understand this stuff; CPAs who do personal taxes don’t have clue. Reading it from a book, as many CPAs have done as their background, makes them no more of an authority than you reading the same. Where am I going with this?
Well, everybody has rented an apartment. You paid the landlord rent each month all year. That was income to him (and an expense to you). But as a renter you got no deduction and you were not required to withhold income taxes from those rent payments as opposed when you received a paycheck (at work) which was income to you. That is about a 5-7% difference in net (extra) income for the landlord. As for the deduction, if you rent a shop and pay rent, that is a deduction as a business expense. Not so with an apartment. Each side of this rent situation has it benefits to each of the parties. The Landlord gets income without out income taxes withheld. If you are renting business space, you get a deduction on your business income for the space rent. Properly structured, that deduction can flow through to your personal taxes as a deduction. (This is not schedule C stuff.) Knowing how to incorporate these and other concepts into your freelancing business is structure, planning and organization. It does not happen on the ides of March or April of the year you are reporting. It cannot happen then. That year is history.
Find someone who has actual experience running a chartered business, with a law degree/background, who has worked as/with management accounts or has an MBA in accounting, and talk about business structure. (Nope not in the yellow pages.) The few hundred dollars you pay for that talk will save you thousands every year (if your coach knows what he/she doing). Use lawyers for litigating; use accountants for accountancy; use tax software for getting the numbers and forms correct; use a seasoned business veteran to structure and organize your business. DO NOT SHOP BY DOLLARS AS THE CRITERIA. Listen, ask questions and chose the one you are most comfortable with–credentials mean almost nothing. Having lots of degrees does not equal understanding business structure for tax advantage. Only a fool looks for lawyers, accountants or other professionals by hourly fee. Good ones charge by their availability, expertise and how much they like working with your situation.
Few attorneys or accountants have the time or desire to know more than basics. You need more.
You cannot discuss anything with tax software and can learn little from it.
Now is the time for April 15, 2011. This year’s reporting plan is already history.
kelly
January 31st, 2010 at 2:39 pmI’ve been using a CPA that used to work for the IRS for 7 years now. Prior to using my current CPA, I had been a Turbo Tax user for several years. My CPA re-did two prior years of returns, and got additional refunds that Turbo Tax didn’t get for me. My CPA has saved me thousands of dollars which has far more than paid for his fees. And yes, we did get audited. He was there and took care of it – and got us even more money back. That will show the IRS not to mess with our returns! He’s been absolutely fantastic!
Laura Spencer
January 31st, 2010 at 3:41 pmGood comments!
I have to admit I use a combination. I’ll use tax software, but then have my accountant look the completed forms over to make sure that I didn’t miss anything.
Vonnie
January 31st, 2010 at 4:54 pmMy husband always does them, and does a good job. My SIL is an accountant too, so when he has a question he just asks her.
If we didn’t do them that way, I would definitely go to a professional. It’s worth it.
Melek
January 31st, 2010 at 7:14 pmi hired a CPA a couple of years ago and it was the best decision i ever made for my freelancing career. i input all my expenses and draws, and he reconciles, pays my state taxes, and makes sure i file everything correctly. for that i pay a monthly fee. then, at tax time, we go thru my quickbooks, i give him home office and personal expenses and he does my taxes. i used to psend the equivalent of 2 weeks of work time doing my own taxes. now, i can sit back and let him do what he’s good at, while i focus on what i’m good at. it has saved me tons of headache and worry.
Amber Weinberg
February 1st, 2010 at 1:23 amThanks to the ease of reporting and expense tracking with Billings, I’m doing my own this year :D My biggest challenge with taxes is forgetting to save receipts on medical expenses or supplies I buy, then remember 2 months later that I could’ve written it off >_<
Hein Maas
February 1st, 2010 at 5:35 amHi,
Taxes are always a pain in the … , last year i did them myself but i was starting to lose my mind while doing it, and at the end when the taxes where filled in, i forget a lot of deductions and it has cost me a lot of money.
August of last year i contracted an accountant and now i’ve got more time to do things i like and the only thing for me to do is sending the invoices etc. once a month to there office.
Regards,
Hein
Kara Gray
February 1st, 2010 at 7:37 amI’ve used TurboTax for the past 5 years. I’ve not been able to find a CPA who really understood the self-employment situation well enough to spend that money. And, if you go to one of the preparation places like H&R Block or Jackson Hewitt, they’ll read from virtually the same Q&A as TurboTax provides.
One thing that makes tracking my expenses so much easier is that I have a credit card that I use exclusively for business expenses and I put everything on the credit card (and pay it off every month). That way, each month I can download the statement and enter anything that I’ve forgotten into QuickBooks.Since I also use QB to write any checks and manage all my billing/invoices, it contains everything I need. A few clicks prints out a YTD report that I can use for quarterly estimated taxes and year-end taxes.
I use Microsoft Money 2004 (heaven help me if it dies b/c they don’t make it anymore!) for all my personal stuff and can do the same thing — a few clicks prints a report, done.
And, of course, I have redundant backups of all of this stuff — one copy on an external hard drive, and one on Carbonite — and hope I never have to use them. : )
FJ Solutions
February 1st, 2010 at 9:53 amWe are in Argeninta, so… TAXES SOFFOCATES US!
Casie G
February 1st, 2010 at 11:56 amHave used Turbo Tax for about 6 years now and haven’t had any issues…probably because I don’t own any property, don’t have any kids or anything else to figure out. :)
The Tax Club
February 1st, 2010 at 12:36 pmThis is a great article. The three categories listed are what taxpayers have to decide every year. Which way they want to go. Tax season is approaching very quickly and now is the time to decide. If you are comfortable doing it on your own then you should, but as stated you may miss out on a lot of tax credits. The choice is yours so make sure you fully understand the pros and cons of each option.
Jake P
February 1st, 2010 at 2:11 pmI’ve done my own taxes with TurboTax for 16 years. I’ve always found it a good way to keep in touch with what’s going on in my business.
But this year, having been an expat in Canada for most of 2009, there’s no way to do it myself–way too complicated. So, Deloitte and Touche is in charge of them this year. Unfortunately, I am anticipating a significant amount due to Canada, even though I didn’t have a single Canadian client. Their so-called “free” healthcare and generous social safety net comes at an enormous price.
Marlene
February 1st, 2010 at 5:26 pmAccountant! Last year, I asked around among local freelancers and have a great recommendation. I’ll be trying him out for the first time this year. His rates are reasonable, he knows what he’s doing and as per the comments above, better to spend my time on paying gigs!
Doktor Thomas
February 1st, 2010 at 6:24 pmKara, et al:
There are three US statuses and the tax situation is different for each: self-employed (sole-proprietor least favorable), independent contractor (Which everyone thinks they are, but usually are not) and chartered small business (the best by far with all the deductions available to the big companies). And as implied in my first piece, understanding how each really works is usually beyond the run-of-the mill accountant/cpa. Not surprised you didn’t find what you needed.
TurboTax does the reporting fine; I use it. But the organization, structure and planning is not addressed within that electronic form filler. Within those three is the grossly underestimated value of reporting everything to pay less in the end.
Laura Spencer
February 1st, 2010 at 8:09 pmWow!
There’s a lot of really good advice here.
Thanks to everyone who joined in on the discussion.
Jordan Walker
February 2nd, 2010 at 10:30 amI hire an accountant to file all the paperwork, I am pretty good about keeping track of expenses but do not want to spend the time learning the nuances of the IRS.
Ramona
February 2nd, 2010 at 12:38 pmIn Romania any business has to work with an accountant. Since I have a firm, this aspect is handled by my accountant. She’s the one doing the legwork / paperwork and all the stuff.I just sing as the President and pay my bills :D
As a person who’s more interested in budgeting than before, I use AceMoney (a nifty free software – well, I got the paid version since I had more personal accounts to “track”) and my “paper-agenda” to know how much I earn and where does my money go.
Ed Gandia
February 3rd, 2010 at 8:59 amEasy! Hire a great accountant — someone who works with a lot of solo professionals. When it comes to simplifying my life, that’s the best decision I ever made. Think you can’t afford it? How much time will you spend filing out forms and trying to figure it all out? That’s time you could have spent on billable work or pursuing clients. Not to mention the headaches and stress that come with trying to figure it all out.
Carla | Green and Chic
February 6th, 2010 at 3:46 amI do my own bookkeeping, but I hire an accountant to do the rest. I don’t have the time or energy to juggle W-2s, 1099s, sales taxes, LLC, filing for two states, etc.
M Smith
February 7th, 2010 at 4:34 amHere’s some good advice I found (for freelancers in the UK in particular):
Finance for freelancers is available if you know where to look
http://www.freelancesupermarket.com/news/2010/2/5/finance-for-freelancers-is-available-if-you-know-where-to-look.aspx
Funding of more than £700 million has been approved for nearly 3,000 UK small and medium-sized businesses from the European Investment Bank (EIB), according to the Treasury.
Marketing and Management
March 5th, 2010 at 7:58 amIf we have specific professional, that will be useful for tax management.
Liz
March 8th, 2010 at 3:11 amI would say Accountant if you have a somewhat complicated business or even with a simple business. Although tax software is great and comprehensive, I find that accountants simply are more familiar with tax laws which most of us would not be able to comprehend, and can often find deductions that we can’t.
It is especially easy to work with an Accountant when I use the online invoicing manager, Billing Boss, from Sage Software (www.billingboss). I run my own business, and I am also a contractor for Sage. Whenever I create any estimates/invoices, my accountant automatically has access to the estimates/invoices I create, track payments from customers, and outstanding invoices. It allows me to keep all my invoices in check, and makes tax season easier for the both of us.
Please note: This author has been compensated by Sage.
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