Tax season got you a little stressed? Yeah, us too. US tax code is complicated and the laws can certainly feel like a moving target, particularly after a complete overhaul in 2017 that goes into effect for 2018 filings. While we certainly don’t have all the answers, we’ve sourced a handful of the best tax tips for freelance and production professionals that we think will get you off to a good start.
1. Writing off business travel
While many of us travel regularly for work, the rules around which kinds of travel are expensable can be a little tricky. In order for a trip to qualify as business travel it has to be ordinary, necessary, and away from your tax home (the entire city or area where you normally conduct business) for longer than a normal day’s work, requiring you to sleep or rest along the way.
IRS-approved business expenses include transportation, lodging, meals (limited to 50% of the total cost) and any other elements you can prove are directly related to business activities. This last category can be a little tricky as there’s no telling what the IRS may flag, but if you aren’t 100% sure the expense is necessary for you to conduct your business, you may want to skip it. Audits are no fun and it’s probably not worth risking one with questionable expenses.
So, how to protect yourself from getting flagged for “unreasonable expenses?” Detailed records are your best bet! Utilizing a spreadsheet with breakdowns of your expenses will help you justify your deductions to the IRS should you ever need to do so. Outlining details such as: item purchased, description of item, date of purchase, and reason for purchase, will help you build your argument.
2. Do you have to pay taxes to every state you earned money in?
Short answer? Yes.
But, of course, it’s also more complicated than that.
Some states have an earned-dollar threshold that must be met before non-residents must pay taxes on the income earned in that state. Sometimes this threshold is calculated as a certain percentage of a taxpayer’s overall income. Other times, it’s a set dollar amount. Keep in mind that you shouldn’t be double-taxed for this income by your home state, though. The IRS will have information for each state’s requirements, but if you’ve done a lot of traveling this year, it may be worth letting a CPA sort out the various laws for you.
3. Occasionally working from home doesn’t make your house a home office.
The IRS only permits home office deductions if your home is the principle place you do your business. Just because you sometimes bring work home, that doesn’t mean you get to write off some of your living expenses as a business deduction.
This doesn’t mean that you can’t claim a home office expense, though. If you have dedicated space in your home that is used only for your work purposes and if this space is the primary place that you do the majority of your most important work-related tasks, it may qualify as a deduction.
One common way to calculate this deduction is to compare the amount of office space with the total space of your home. For example, if your office is 100 sq ft and your home is 1,000 sq feet, you could write off 10% of your home-related expenses on your tax return. Alternatively, you can claim $5 per sq ft. of dedicated office space, up to a cap of 300 sq feet.
4. Your Side-Gig
First of all, is your side-gig a business, or a hobby?
The IRS uses 9 factors to help them determine whether or not you’re a business. First and foremost, however, the IRS is interested in whether you are profitable, whether you’re making a concerted effort to become profitable, and whether you depend on income from that activity for your livelihood. While you can claim a loss for a while as a business, sooner or later the IRS is going to want to see some profitability. Otherwise, you’ll be moved to a “hobbyist” and no longer allowed to take deductions in conjunction with said activity.
Another thing to consider is that you really should be track your income and expenses like any other business. There’s a common misconception out there that if you aren’t issued a 1099, then you aren’t liable for taxes on that income. This is false. All income earned through a business, as an independent contractor, or from informal side jobs is considered “self-employment income.” You are still responsible for reporting this income to the IRS and paying the appropriate taxes on it.
Speaking of taxes… you’re probably better off to pay them quarterly like any other business. Generally, if you expect to owe $1,000 or more in yearly taxes, then you should pay quarterly estimated taxes. Otherwise, you may be subject to penalties at tax time. Freelancers who make estimated tax payments during the year may get refunds if their estimated payments exceeded their liability, but freelancers who don’t make estimated payments during the year are likely to owe a balance when they file.
5. When in doubt, hire a professional.
Time is money, friends. Unless you’re well-versed in ever-changing US tax law, it’s highly likely that you’re ultimately better off to pay a professional to handle your filings. Not only will this help you avoid spending countless hours scouring the IRS website trying to make sense of your specific tax circumstances, but it will help you avoid making costly mistakes. You could cost yourself hundreds of dollars on missed deductions, or in a worst-case scenario, you may underpay and end up in an uncomfortable encounters with the IRS. Hiring a trusted CPA to handle your taxes may just be one of the best expenses your business incurs on a yearly basis.
Looking for more industry-specific information?
Last year, we organized an informational panel to support our industry regarding best practices for taxes. These topics are covered more in-depth with CPAs in this panel, with real industry-specific examples. Check out the video from this event here!
DISCLAIMER: Hey, friends. We aren’t CPAs. All information provided in this article is for informational purposes only and is absolutely not a substitute for legal or professional advice. The author makes no guarantee as to the accuracy, completeness, timeliness, suitability, or validity of any information and will not be liable for any errors, omissions, or delays in information. But… if you really want to capitalize on our expertise, we’d be glad to consult with you about any of your photo production needs.