Ways to Prepare for Next Years’ Taxes, For the Self-Employed

Taxes are hard to prepare. You know this now more than ever. Having completed your 2014 tax filing, you know what worked and what didn’t, what was easy and what was difficult. There are always certain sections, if you are preparing your taxes yourself, that leave you scratching your head. This is especially true if you work for yourself, as I do. For someone who is self-employed, it is especially important to be scrupulous in your tax filing and preparation to make sure you don’t have any trouble with the IRS down the road. Here are 3 ways I make sure that my taxes are above board each year, to avoid headaches and, most importantly, audits.

 

1) I Record All Income and Save Taxes as I Go. As a self-employed individual, I have to pay taxes once a quarter. These taxes amount to almost 30% of my income. Ouch. In order to make sure I don’t have any surprises, I always save for taxes as I go. It was a discipline that was difficult at first, but it’s easier now. I have a special savings account devoted to taxes. So each check I get, I immediately throw 30% of it in there, and make note of the date, client, and job for which I was paid on a handy spreadsheet I update all the time for this purpose. By doing this, I am much more likely to stay in the good graces of the Internal Revenue Service.

 

2) I Keep Careful Record of All Investments. I have a handful of investments growing in various places, so I’ve got to make sure all of these are accounted for. Before tax time, I call up every institution with whom I have investments and make sure they’re sending me the documentation I need at the correct address. I do this because I have moved a lot in the past 2 years. And now that I’m in one place to stay, things still end up at the wrong address. It can be a pain to have to get these places to resend tax documents, so I like to double check that everything I need is coming at the right time to the right place. Now make sure you’re not forgetting any investments. You IRA? Your 401(k)? CMC Markets and other day trading? Once you’ve got it all, keep track of it.

 

3) Hire the Pros. At the end of the day, I usually hire a professional. It costs a little more, but it’s worth it to me. Because I have money coming from so many chaotic sources, it gives me peace of mind to know that someone who does this all day has put my numbers in order. Many professionals offer audit protection too, making them liable for any mistakes that may have slipped through your taxes. In the end, the IRS really just wants their money, so if problems pop up you can usually just pay and the issue is resolved. But by hiring the pros you negate the possibility of negative issues flying back in your face. Taxes are resolved in a sitting, and you can get back to your life.

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16 thoughts on “Ways to Prepare for Next Years’ Taxes, For the Self-Employed

  1. Great post. I’ll add that I’ve found MLPs to be excellent high yield investments, but you pay for out-performance in the form of tax preparation pain at year end. The K-1 has 20 boxes, each of which can have multiple “letter codes” to address at filing. Something to consider *before* you invest in a publicly traded partnership if you do your own taxes like I do.
    Financial Velociraptor recently posted…Safe Utilities With LNG Upside Part 1 of 2My Profile

    • Hi FV,

      I fully agree with you that K-1s can be a real pain during tax time especially when many come so late into the new year and sometimes after taxes have already been filed. I have never prepared my own taxes but I can see how MLP investments can be a drag during tax prep time. Thanks for commenting.

  2. Yeah I have a friend who is self employed and he follows the same steps you do. Saving is hard so you have to be really disciplined. I did my taxes myself through H&R Block. They offer audit protection as well. It was pretty easy this year because I was able to import my ShareBuilder tax info directly into the H&R software.
    Hope you got a refund
    DFG
    Dividend Family Guy recently posted…My Wealth Has Increased DramaticallyMy Profile

    • Hi DFG,

      No refund for me this year. Usually I’m left owning a little or as in this year it was a wash. No refund, no owing. Being self-employed you really have to keep track of all the expenses you have as well as be careful to set money aside for tax purposes. Thank you for stopping by and commenting.

  3. DivHut, I do the same with my businesses and trading – always save 30% to a savings account, although it makes nothing in there, but it is out of my reach and ready to be used when taxes come.

    I converted my trading into business last year since I had a lot of options trades (my turnover reached 1.7 million bucks, wow, I wish I had that in cash, lol), so I had to hire professionals to deal with that trading and saving money for taxes throughout the course of the year really helps a lot. I have been doing this since day one to avoid surprises too.
    Martin@hellosuckers.net recently posted…Kinder Morgan (KMI) increases its dividendMy Profile

    • Hi Martin,

      You have to save. Our accountant told us this fact many, many years ago as to not get into trouble. Saving about a third of your income is a fairly safe bet to make, of course, sometimes business really picks up in certain years and you are still left owning a lot come tax time.

      Sometimes it’s best to hire a pro to take care of taxes when things get complex, whether it’s from trading, as you mentioned, or you run your own business and need the assistance. For most who simply work a job and may have dividend/interest income preparing taxes yourself might be the best bet. Thanks for commenting.

      • I have always been hiring an accountant as my taxes were always complex. Like I cannot do things the simple way. I am a fully employed, then my wife runs our family business, I have my trading company and I am also a partner in some other partnerships, so I left this mess to professionals since day one 🙂
        So I agree that some people do not need it and do it themselves, but I do not belong to that group so the advice of saving for taxes was always my #1 task to do from every income received.
        Martin@hellosuckers.net recently posted…Kinder Morgan (KMI) increases its dividendMy Profile

        • Hi Martin,

          Much like investing or anything else in life, it’s all about personal taste, preferences and individual circumstances. Sure, some can get by doing their own tax prep while others, myself included, definitely value the assistance of a CPA.

  4. I am with you on all points. I had real issues with my KMP situation this year. I tried to hire a professional, but nothing cam of it. I also went directly to the IRS and the National Association of MLP’s. A complete a waste of time. In the end, I schooled myself, and filed the return after learning the ins and outs of a K-1, article 751, and UBTI. I feel like I should be doing taxes for a living now, LOL. By the way, very nice article.

    Keep cranking,
    Robert the DividendDreamer

    • Hi dividenddreamer,

      K-1’s, what a pain. I didn’t even attempt to try and make sense of my units etc. I handed all that paperwork to my CPA and gladly paid his fee for my tax prep. Even without K-1’s I feel that tax prep is usually a daunting task with ever changing rules, regulations, allowed deductions etc. I have been going to a tax guy since I started my business back in 1998. Prior to that I did things myself as all I had was wage income with a little dividend income on the side and could work out a 1040-EZ file. Thanks for sharing your own K-1 experience.

    • Hi dividenddreamer,

      I just have a regular IRA and ROTH account. Not sure how that could affect my tax bill. I do know that I could open up a 401K plan for my business which would allow me to contribute more of my income into that retirement vehicle but quite frankly I feel like things are getting too out of hand as I already have multiple bank, stock and retirement accounts already set up under my name.

  5. I have been taking 30% of my self employment income and putting it into a Savings account for 2 years now. Once there, that money ceases to exist until it is time to deposit more. That account has more money that my savings account! It’s so annoying. But, I don’t touch it. Otherwise, I might be freaking out come April 15 because I don’t have the money to pay.

    On April 15, I give myself a refund from what is leftover after paying the IRS.

    I tell all my clients to do this so that taxes are less stressful.

    • Hi Morrigan,

      I was advised by my accountant many years ago to divide my income by thirds and set aside 33% for taxes. Sounds like you are doing the same. I know it can be annoying to have money sit in an account that yields little to nothing but what can you do? I remember many years ago we had an ING Orange savings account that we placed our money in and watched it earn about 5.5%. Of course these days it earns under 1%. Better safe than sorry and have that money come tax time. Thank you for sharing your experience with setting money aside for taxes.

  6. Great advice! Getting organized before tax time really does make an appointment with a tax pro go over so much better. It’s a pain to comb through all those receipts, but keeping them organized can really save you time and money!

    • Hi Brian,

      I totally agree. I always go to my tax pro very prepared. Most appointments go by very smoothly and I’m often taken care of in about fifteen minutes as everything is organized before the meeting.

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