Tax Time Tips for Solos and Freelance Legal Professionals
The majority of projects through Hire an Esquire are W-2 where we’re the employer of record and we withhold taxes and provide benefits.
Still, we have an increasing amount of solo practitioners on both sides of our marketplace and more members of our network, like the rest of America, are engaged in “side hustles” inside and outside of the legal industry.
Independent contractor income can provide freedom, flexibility, supplementary income... and panic at tax time. So, we’ve asked Lance to provide some tips and tricks to help you lower your tax time stress and bill. Lance simplifies accounting tasks like tax prep and expense tracking for freelancers and solopreneurs and provides automated tax savings and customized business guidance.
By Oona Rokyta, CEO of Lance
The average US taxpayer misses $5,000 in Tax Deductions. Don’t be average!
The Lance team has discovered that freelancers routinely forget $5,000-$10,000 in additional income when guestimating earnings from the previous year. While forgotten freelance income can provide a bigger than expected (and saved for) tax bill, forgotten deductions can reduce it or result in a considerable refund. Here are tips to ensure you don’t miss income or expenses:
Write out a list of all the clients you’ve serviced or offices you’ve worked in over the past year.
Now write out all the financial accounts you’ve used to pay for business-related expenses including Lyft rides, your home office (in the form of rent or mortgage payment), utility bills, conferences, networking meals, self-paid healthcare benefits, insurance, coffee meetings paid for via your Starbucks app, miles you’ve driven for clients, trips taken on your public transit passes, etc.
Print out all your related bank statements and match them up to make sure you’re not missing anything income or expense related. Don’t forget about costs hidden in personal accounts – rather than staying neatly contained to a business checking account or credit card.
Even if you use an accountant or bookkeeper to comb through your bank and credit card statements, these steps will help you avoid missing income and deductions. Your accountant or tax software is only as good as the data you provide. At Lance, we’ve heard countless stories from consultants and accountants alike of tens of thousands of missed deductions or audits because of data that wasn’t accounted for early on in the process.
Consider an LLC or S-Corp for marketability and advantages under the new tax bill
The new tax bill has not been kind to the average American. But, it’s packed quite a few advantages for businesses over a certain income level. It may be worth exploring or discussing with your accountant if you would benefit from filing as an LLC or S-Corp.
Under the new tax bill, corporations (including LLCs and S-Corps) are taxed at a rate of 21%. This could be a tax advantage depending upon your projected income level and filing status for 2019. A few other things to note:
Business owners with LLCs or S-Corps can choose to elect this tax bracket along with paying payroll taxes for their personal income from the business.
If you separate your business and personal income — and save more in your entity’s business accounts (while still paying yourself a reasonable income) — you may also be able to decrease your personal taxable income.
Be sure to consider filing fees and annual taxes in your state and locality — these can eat up all or more of your tax savings depending on your filing location and income level.
Traditionally, a major non-tax advantage of LLCs or S-Corps was protecting your personal assets from liability — in the era of the gig economy, there are additional advantages. Standards vary by state regarding employee versus independent contractor classification, and these standards are quickly shifting. With the high risk of liability and penalties for misclassification, more clients are requiring and/ or favoring freelancers and contractors who have registered as businesses so employment distance is clear and formalized.
Regardless of how you chose to be paid by a client – as a sole proprietorship, LLC or S-Corp – make sure you have an EIN in place and handy. You can get one for free at www.irs.gov for sole proprietors. This is a safe alternative to proving your social security number on work-related forms. In addition, you’ll always need an EIN to open bank accounts, credit cards and loans related to your business and building its credit.
Want an easier path for next year, consider downloading a tool - like Lance - that automatically pulls all your expenses and income into one place so you can simply review your finances this time of year – or at any point – to calculate all your taxes.
Lance also calculates your taxes in real-time and will soon allow you to automatically save just enough for taxes while considering your usual expenses. If you have any questions or want help prepping your 2018 taxes, we’re offering a complimentary 30-minute consultation session with their team of friendly and knowledgeable CPAs for all Hire an Esquire members. Just click here to schedule your complimentary 30-minute Lance call today!