10 Tax Tips to US Designers that help you Avoid Audits by the IRS

You need to rush – April 15^th is approaching, and you haven’t found anyone to help you with filing your taxes for your freelance design business. You are unprepared, and now you have to dig through your records for every last detail. You think you have it all set. You decide to file them yourself and manage to send the forms in before the deadline.

Knock, knock! The IRS is at your door.

Your last-minute filing has cost your business a nice chunk of your profits. The IRS doesn’t care about your story; they want their money. They want to audit your business because of several questionable mistakes, and demand that you hand over all forms and records.

Save yourself the headache of an audit and check out these last-minute tips you should know before you file.

Is your tax preparer right for you?

As your business grows more successful, it also becomes more complicated to file your taxes. You should take your time to find the right CPA or major accounting firm for you. One advantage of hiring a CPA, they will take more time with your taxes than a firm and you can rest easy knowing that your taxes are properly handled. However it will cost you more money. If you want your taxes done as soon as possible because you are late, an accounting firm is your best option.

Warning: Don’t be late when filing your taxes! Not only will you be charged fees for late returns, you can also raise red flags if you have mathematical mistakes or other general errors because you rushed the return in.

Keep it simple

Last year went well for you, you now manage multiple little business ventures you started separately, such as web design, logo design, stationary, and more. Simplify your record keeping and group them together under a single business company brand. It can help your tax preparer tremendously when it comes to time to file and will give you more options for deductions which can lead to a bigger tax return check.

Source: ThinkStock/thomas-bethge

The two office dilemma- work office and other

The IRS has lightened up on home offices as an audit alert, that’s the good news. To be eligible for this deduction, the space you set aside is used strictly for your business, and you need to keep careful track of all the expenses associated with running that office. Everything you do there is carefully documented because if you do receive a notice from the IRS about an upcoming audit, they will look at your records.

The bad news, be careful about sharing a home office. Your office must be yours and yours only, and if do you share the room, have separate desks, filing cabinets, and keep separate records.

Payment services online

Any crowdsourced website or pay service website will keep strict records of money because they are protecting themselves from auditing.  These businesses will keep their records correct and true, so don’t lie about what you got from them.

In the US, funds raised on Kickstarter are income. A Kickstarter creator can offset the income from their project with deductible expenses related to the project, and accounted for in the same tax year.

If you accept payment through the Paypal website or any pay services site, no matter how much or how little business you have transacted over the site in the course of the year, you can write off those fees the same way big businesses are able to deduct credit card convenience fees. It counts as a “necessary cost of business.”

The easiest way to document fees is to wait until the end of the year and print out your account history.

Watch your tax write-offs!

Record all expenses related to your freelance design business so that you can write them off of your gross income. Your dinner date with your mother doesn’t count, but your luncheon with a client does.

Some of the expenses you need to keep track of should include:

• Advertising costs
• Computer/software/office appliances
• Office supplies
• Industry niche research- Netflix/DVDs/Movie tickets to help with your current work
• Dues for professional organizations
• Mileage for business-related travel- Travel from home office to work office included!
• Telephone/Cell phone expenses- only those after the first home house-line

What to keep in your expenses records

You should also keep all expenses in a log, with the following information included:

• Name and Location of Expense
• Amount Paid
• Date and Time
• What the company expense is for
• If entertainment or food: Person you entertained or dined
• If entertainment or food: Discussion you had

Affordable healthcare expenses

Under the new Affordable Healthcare Act, everyone in the United States must have healthcare, and that includes you as a freelancer. This is extremely important to remember since every year that you are not covered by the new healthcare system, you will be paying a healthcare tax as a penalty from your tax return. Get covered and then, claim it as an expense!

Source: ThinkStock/Martin Poole

Your handwriting is hard to read and your papers are messy

With the rise of the digital age, the number of people with terrible handwriting also increased. I strongly recommend typing up your return or having your tax preparer e-filling your returns. You may have to translate what you wrote down on your return if the IRS can’t read your writing. Save yourself from the long phone call.

Don’t lie about your living conditions

The IRS does become very curious about you if you say you took in less than $20,000 that year, but you live in a rich suburbia neighborhood. The IRS will want to know how you spread around your money with those living conditions compared to what you took in that year. If you rent or live with someone, then you have nothing to fear if the IRS comes calling.

Warning: If your income this year is lower than last year and you are still living there, but you aren’t claiming a disaster or loss of business, the IRS will wonder where you are hiding the money. I can’t stress enough to keep records of everything!

Stop reporting the wrong taxable income

With all this talk about tax returns and deductibles, take the time to make sure that your tax forms are in order! If you are doing your own taxes and keep your own records, there are several forms you must use to make sure everything is correct. The last thing you want is the IRS knocking at your door because you forgot to hand in a specific form.

Freelancers need to file their W-9.

Clients file a 1099 for your services.

Fill out your taxes on the 1040 form, although most freelancers complete the Schedule C form. If you make less than $5,000, use the simple form for filing freelance taxes Schedule C-EZ.

If you follow all these tips, you can relax on April 15^th.Do you have any tips to fellow designers or any horror stories about tax season?