While every business owner’s situation is unique, learning from the mistakes of others is a great way to begin your journey towards tax efficiency from day one.
In this post, we’ll cover the most common tax slipups made by freelancers and solo entrepreneurs.
Note: The information provided in this blog is geared towards solo business owners filing Federal Form 1040 with a Schedule C or those with a partnership filing Federal Form 1065.
1. Tracking everything with an Excel worksheet
Excel is a powerful tool – but not so powerful that a single spreadsheet can cover all your business tracking needs.
Risks associated with relying on one worksheet as a catch all include:
- Missing expenses that could be used as write-offs
- Accidentally under or overstating your income
- Cannot compare numbers from month to month
- Inability to track key metrics
- Makes it difficult to enact tax efficiency strategies
Even the smallest freelance business can benefit greatly from generating the three most important financial statements:
- Income Statement – Measures all revenue against expenses to calculate net profit
- Balance Sheet – A snapshot of assets, liabilities and owner’s equity to highlight company health and help determine solvency
- Cash Flow Statement – Evaluate financial strength and liquidity by analyzing cash flows in and out of the business
2. Following generic tax advice
There is no such thing as one-size-fits-all tax guidance. While it’s a good idea to educate yourself on generic tax recommendations that may apply to your situation, you should always consult with a tax professional to determine which strategies are the right fit for your business.
3. Deducting healthcare premiums as a business expense
As a solo business owner, healthcare premiums cannot be listed on your Schedule C as a business expense. This means you are responsible to pay self-employment tax on the income used to pay your premiums.
While you can use healthcare premiums to reduce personal AGI for income tax purposes, you cannot lower business taxable income in the same way a corporation can.
4. Mishandling home office write-offs
It’s a common misconception that all expenses related to working from your home office can be used as tax deductions. Home office deductions are both limited and only allowed when certain tests have been met.
5. Choosing the wrong method for vehicle write-offs
If your car is eligible to be used as a business expense, you can either write it off using “actual expenses” or by “mileage.”
Each method offers distinct advantages and disadvantages, depending on the value of the vehicle, if it is new or used, how long you plan to keep it, how much you use it for business purposes, and whether you prefer simple or more complex recordkeeping.
6. Missing estimated tax payments
Unlike 1040 filers without business income, freelancers and solo entrepreneurs are responsible for making quarterly estimated tax payments to the IRS. Failing to make timely or sufficient estimated tax payments can result in interest and penalties.
7. Mismanagement of 1099s
Knowing when to fill out W-9s and when to send 1099s is a learning curve that is now more complicated than ever with the enforcement of new laws regarding the reporting of third-party payment services. Be sure to work with your Seattle accountant to know for certain you are staying in compliance.
Achieve tax efficiency as a freelancer or solo entrepreneur
Our team believes a tax return should be the result of strategic planning, and never a surprise. Understanding your unique business setup and goals is crucial for determining the right tax strategies and regulatory requirements.
Start your journey to tax efficiency by requesting a free consultation with our team here: online contact form.
