Some mistakes that too many freelancers make.
- Believing you earn too little to file taxes. You have to pay self-employment tax if you have a profit of $400 or more.
- Thinking and spending like your gross income is your personal income. Your personal income is your gross income minus all your business expenses.
- “If I don’t get a 1099, I don’t have to declare the money.” Whatever you get paid must be declared. A related misperception is that if you get paid in cash, it doesn’t count. It is your responsibility to track of every dollar you earn and to report it.
- An extension is an extension to pay. With this way of thinking, you only owe the money by October 15th. You must pay what you owe when you file the extension or you will be charged extra. And if you haven’t paid in enough withholding or estimated taxes over the previous year, you may be charged for that as well.
- A credit card statement serves as sufficient proof as an audit that you bought something. This belief is partially right. A credit card statement serves as proof that you purchased something from that vendor. You need a receipt saying exactly what you bought as well the credit card statement or the check. If you pay cash, you generally need a receipt as well.
- If you have money paid in for estimated taxes and withholding and you don’t think you owe anything, you do not have to file a return. You must still file a complete tax return. A related misperception is that if you haven’t filed and are due a refund, that you can always file and get that money. You only have three years to get a refund.
- You can put whatever name you want for you, your spouse, or your children on your tax return. The IRS will not let you take an exemption if the name doesn’t match the name on that person’s Social Security card.
- The income you put on your Schedule C is the amount you’ve billed. Typically, you’re on the cash basis. You should put in the amount of money you’ve received in the calendar year for which you’re filing.
- If someone owes you money, you can always send them a bill. While technically true, the longer you put off billing a client, the longer it takes to collect what you are owed, and you might not be able to collect it at all.
- You rely on the 1099’s you receive and declare the income. If you don’t keep track of the money you receive, you can’t tell if the 1099’s are accurate nor can you correct any errors. You won’t be able to tell if you missed getting a 1099. The IRS will then send you a letter saying you owe additional money plus penalties and interest. Then you will have to settle with the state(s) you live and/or work in.
- You don’t believe that you really have to keep good records or that you will ever get audited. Unfortunately when the letter comes from the IRS telling you that your business income and expenses will be reviewed in detail and you realize that the failure to have records means that unless you go through a lot of hassle which might not be enough to help the situation, you might owe a lot of money, and it’s too late, at least for that year.
- You incorporated your business because you think all businesses should be incorporated. You heard incorporating will save you money. Then you discover that you have to be on a W-2 as the owner, that you have to be much more rigorous about the accounting system that you use, that you have to file separate forms as a corporation and that the whole thing is more expensive and more of a headache than not being incorporated. When you have a business, investigate what form your business should take. You might decide that being a sole proprietor remains the simplest and best for you. You can also look into being a single member limited
liability company (llc) instead of a corporation. For some of you, a corporation might be the option you choose.
- You ignore reimbursed expenses. The IRS says you owe additional taxes. They expect you to include reimbursed expenses as income and deduct the expenses appropriately on your Schedule C.