Yes, the day you’ve been dreading has arrived. No one really enjoys filing their taxes, but for many procrastinating independent workers today is especially painful, with mountains of paperwork, avalanches or receipts, and the painful realization that, despite the many upsides of going it alone, not having an employer and a fixed monthly check can be a real pain at least once a year.
Still, even if you’re among the most tardy and disorganized of freelancers, at least you can count on the media to help out, offering their annual onslaught of articles peddling tax tips for the self-employed. To save you time we’ve sorted through them to weed out the obvious (that guy who says he can get you your refund in two days? Yeah, he might be a scammer) and the repetitive (keep your paperwork in order, people!) to find the few less expected gems. Primary among them this year is the SEP IRA.
Accountant Neil Johnson told Business Insider that opening a Simplified Employment Pension IRA funded from freelance income could help reduce income tax. Both the Chicago Tribune and SmartMoney agree, with the latter offering more details about who should look into a SEP IRA and how to do so:
Establish SEP for Big 2011 Tax Break. If you’re self-employed and have not yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a large deduction on last year’s return. In fact, if you extend your 2011 return to October 15, you’ll have until that late date to take care of the paperwork and make a deductible contribution for last year. The deductible pay-in can be up to 20 percent of your 2011 self-employment income or up to 25 percent of your salary if you worked for your own corporation. The absolute maximum amount you can contribute for the 2011 tax year is $49,000. To establish a SEP, go to your bank or brokerage firm and fill out Form 5305-SEP. It takes five minutes. But don’t jump the gun. You may not want a SEP if you have employees, because you would probably have to cover them and make contributions to their accounts. That might be too expensive. Bottom line: if you have employees, don’t start up a SEP without consulting your tax pro.
Besides endorsing the SEP idea, the Tribune also suggests a crafty way to approach sorting out your health insurance via a suggestion from TurboTax: “if you hire your spouse and give him health care benefits, you can put yourself on his health care policy, which saves money on self-employment income and tax. Similarly, if you hire your dependent for clerical tasks or even to clean your home office, the wages will be deductible for you, and if their earned income is less than $5,800, they won’t owe any tax on the money either,” writes Anya Kamenetz in the article.
Of course, just because these are the less obvious suggestions, doesn’t mean the usual advice doesn’t remain valuable. It might sound like nagging to hear, once again, how important it is to get professional help and remember all your deductions (the Tribune offers a helpful run down of broad categories to keep in mind) but people still mess up the relatively straightforward aspects of filing. A recent study, for example, revealed that the most common small business tax mistake was mixing personal and business expenses. We all know you shouldn’t but apparently many of us still do. LearnVest helpfully compares specific scenarios that are perfectly alright to those likely to trigger an audit.
So good luck to late filers, remain vigilant on the basics, and try out some of these slightly more advanced tax minimization efforts if they seem right for you.
Are there any other less well known tax tips that have helped you trim your bill?
Image courtesy of Flickr user Mat Honan.