Tax Day, April 15, is only five days away. There are a number of interesting facts about Tax Day, provided by BillShrink.com. My favorite is also a money saving tip:

The average family could recoup 10% of their tax bill by choosing a better wireless plan and getting cheaper gas. Cool, huh?

I’m back for part 3 of talking about estimated taxes - you can (and should) read part 1 and part 2 first. Thanks, everyone, for sticking this out - I know the info can be a little dry by it’s definitely worth knowing! Let’s finish by talking about how to pay.

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What forms do I need?

You’ll enclose Form 1040-ES, which is an estimated tax voucher. You don’t need help filling this one out - all it is is your name, ssn, and amount you’re paying. Once you’ve done it your first year, they’ll automatically send them to you afterwards, preprinted. You don’t have to justify your estimates in any way or even sign anything. You’ll do that when you clear up everything at the end of the year (by April 15 of the following year).

Where do I send the check/forms?

That depends on where you live. Every quarter, you’ll actually be sending out three checks/forms - one for federal, one for state, and one for local. The address is NOT the same as the address where you send you income tax return every April.

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Tax day is just nine days away. Eeeeeeeeek! If you’re like me, you’ve just begun to sort through your receipts and 1099s. I haven’t even gotten to working on the actual form. If you’re still working on your taxes, here are some last minute tips for small businesses, such as freelancers, from the people at the National Association for the Self-Employed:

– Check for hidden deductions: There are a number of deductions that small-business owners and the self-employed forget when filing taxes. If you work out of your home, your office may qualify for a deduction. Do you drive to the post office or a client site? Those miles may add up to a sizable deduction too.

– Retirement Savings: Retirement savings, such as SEP contributions and IRA deposits, are deductible for last year’s tax return up until April 15, 2009. That means you can count money deposited into these
accounts, up until the day you file your 2008 tax return. In the case of SEP contributions, those can even be made up until an extended due date, as late as October 15th.

– Filing Date: If, despite all your rushing around, you still can’t make the April deadline, relax. All tax filers can get an automatic 6-month extension by filing Form 4868 by April 15th, which you can download from the IRS Web site at http://www.irs.gov/. However, an extension of time to file is not an extension to pay. If you do not send the IRS what you think you owe, you’ll be stuck with late fees and interest.

– Proofread the form: Most of the mistakes on tax returns are simple addition and subtraction errors. Check your math. Then, check your math again.

– Start thinking about next year: While micro-business owners may be tempted to finish their return and not think about taxes again until next year, now is a great time to reflect on how to reduce your 2009
tax liability. Consider deductions for a home office or employing your children; create a health reimbursement arrangement, which would enable the business to reimburse bona fide employees for all out of
pocket medical expenses; reconsider the tax implications of incorporating your business; and research retirement plans designed specifically for the self-employed, including an IRA, SIMPLE, SEP, Single 401(k), and Keogh plan.

– Look for help: Sole proprietors doing their own taxes can find help from a number of sources, including the NASE’s Tax Resource Center [tax.NASE.org], where you can ask the NASE’s expert CPAs a question
and hear back within a few business days. You can find Schedule C from A to Z, a line-by-line guide for completing the tax form Schedule C, available online at http://www.nase.org/. The IRS also offers a Web site (http://www.irs.gov/) and toll-free help line, 1-800-829-1040,
for your tax questions.

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Thanks for coming back for part 2 of our FAQ on paying estimated taxes if you’re a freelancer. You can read part 1 here, where we covered what estimated taxes are and whether or not you have to pay them. Let’s continue with some more information about estimated taxes.

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When do I pay estimated taxes?

You probably know that taxes for each year are due the following April 15. Estimated taxes are paid during the year, however. You’ll pay them quarterly by April 15, June 15, and September 15, of that year and January 15 of the following year for your fourth quarter.

Note - you need to pay TWO things on April 15 every year if you’re a freelancer - you have to clear up any unpaid taxes from the previous year and you have to make your first estimated payments of this year! You can’t combine them and send them in together - they go to two separate places.

How much should I pay in estimated taxes?

That depends on where you live and how much you earn. You’ll have to pay federal, state, and local taxes…and state/local changes depending on where you live. The federal tax rate is calculated by bracket. It’s kind of confusing, and the amounts vary every year, but let’s talk about it from a 2008 standpoint.

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Early this week, I posted some information about budgeting for your business taxes, and Jennifer Rowland left the following comment:

Could you do a follow-up article on quarterlies? A lot of new and accidental freelancers would appreciate some info about when you need to pay quarterlies, how you do it, when you need professional advice from a business banker or an accountant–that sort of thing.

I agree, Jennifer. When I first got into freelancing, I had no idea what I was doing. Lucky, the person I was dating at the time is a CPA! Since tax laws change ALL the time and laws vary from state to state (and DEFINITELY from country to country), I do recommend talking to your own accountant as well. And please, if you are an accountant, and I’ve made a mistake, feel free to correct me!

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What are estimated taxes?

When you’re on staff somewhere, taxes are taken out with every paycheck if the government didn’t do that, they’d get huge lump sum payments in April instead of smaller payments four times a year. For a freelancer, no taxes are taken out of the money you earn. Therefore, you have to pay them in yourselves - and the government wants you to do so four times a year instead of in one lump sum. These are called “estimated taxes” because you’re estimating how much you’ll make for the year, based on last year’s income, and splitting the percentage owed into quarters.

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As a freelancer, you don’t get paid in the same way as an employee. As you’ve likely noticed, clients don’t take taxes out of your check whenever they pay you, like happens when you’re on a payroll. That doesn’t mean that you don’t have to pay them, though. While many people get refunds this month when they get their taxes done, you’ll owe them if you earned money freelancing in 2007. New to freelancing for 2008? Let me sure with you a really great way to make sure you’re prepared to pay the tax man this time next year.

First, when you get your taxes done this year, talk to your accountant (or the guy at HR Block, whatever) about federal, state, and local rates. Every state/local tax rate is different, so the percentage you’ll pay is slightly different from what I pay here in Pennsylvania.

Instead of thinking about that as a lump sum of your total annual income, think about it as a piece of every check you get. The best way to make sure that you don’t spend the money is to pay yourself first every time you make a deposit into your account.

If you don’t have one already, open a savings account. Although you do want to look for a good interest rate, I find it much more convenient to open the savings account at the same place you have your checking account. That way, you can transfer money freely and, in most cases, online. Be careful, though, to check how many times you can transfer money to and from your savings account without penalty, as some banks impose limits.

When you get paid for a job, automatically take out the percentage you’ll need to pay for taxes and put it in your savings account. If your bank has limits or you don’t want to open a savings account, you can also write a check to the IRS every time you get paid. Of course, you don’t have to mail all those checks when it comes time to pay your taxes - you can rip them up and write one big check instead. The point is this: every quarter, you need to have enough money to pay your taxes. If you fall behind just a little, it can be hard to recover.

Paying taxes stinks. You can’t escape it, though, so you need to be prepared. Pay your own savings account first so that you can pay the government later. You can check out Kelly at TaxGirl for tons of great tax-related information.

Are you a long-time freelancer? Leave a comment below to tell us how you budget to pay your taxes.

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When most people think of taxes, they start thinking about deductions and credits. When you are getting your tax preparation checklist together, however, it is also important to think about what Uncle Sam considers income. This is especially important to consider since the recession has inspired many people to save more — and even to invest in bonds. Those who are a little more adventurous with their money are even investing in municipal bonds, which are considered riskier than Treasuries. What many don’t understand is that the interest earned on savings accounts is taxable. And so are the capital gains on some municipal bonds.

Interest income

When you earn interest on your savings account, you are required to report it. Interest income is taxable. There’s a special place for it on form 1040 — right there on line 8a. Your banks should send you a 1099-INT statement. Some banks, however, don’t send the form unless you earned more than $10 for the year. But you are still responsible to report the income, even if the bank doesn’t send you statement. If you earned more than $1,500 in interest, you will be required to fill out Schedule B and file it along with your 1040.

Municipal bonds

Many people like to invest in municipal bonds because you can get a better return than investing in federal Treasury bonds. Another tempting reason is that, for many  municipal bonds, you do not have to pay taxes on the interest earned. However, this doesn’t mean that you do not have to pay tax at all. The capital gains tax may still be in effect for your municipal bond investments. Make sure that you understand the tax rules attached to municipal bonds — or you could find yourself audited.

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As the US tax filing deadline approaches, the Texas Society of CPAs has put out a list of some of the most commonly missed deductions. Here is their run-down:

CHARITABLE CONTRIBUTIONS

Most people know that cash charitable contributions can be deducted as an itemized deduction. But not everyone realizes that you can deduct the fair market value of non-cash donations, such as used clothing, furniture, and household goods.

IRA CONTRIBUTIONS

Contributions to a traditional IRA might be deductible, depending on your age, total income, and whether you are covered by a retirement plan through your employer.

HEALTH INSURANCE FOR SELF-EMPLOYED WORKERS

Premiums you pay to cover yourself and your family are 100 percent deductible as an adjustment to gross income.

EARLY WITHDRAWAL PENALTY

If you incurred a penalty as the result of an early withdrawal from a certificate of deposit or other type of time deposit savings account, the amount of the penalty is deductible as an adjustment to gross income.

SOCIAL SECURITY TAXES FOR THE SELF-EMPLOYED

In computing your adjusted gross income, you can deduct up to one half of self-employment taxes paid during 2008.

HOME EQUITY LOAN INTEREST

You can deduct interest payments on up to $100,000 of home equity loan debt.

MILITARY RESERVISTS

Reservists who serve more than 100 miles from home and stay overnight are eligible to deduct non-reimbursed travel expenses.

ALIMONY

Divorced taxpayers may write off alimony expenses as an adjustment to gross income, but not child support.

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Seven countries in Europe and Asia have agreed to modify their stances on tax information reporting for U.S. taxpayers with foreign accounts. Under a previous treaty, they would only honor IRS requests for information is they could provide “specific evidence of tax offenses.” Now, lower standards will apply.

Countries and territories changing their stances on bank information reporting include Liechtenstein, Switzerland, Luxembourg, Austria, Andorra, Hong Kong, and Singapore. In the past, these were some places people would “hide money” (we’ve all heard about the infamous Swiss bank account used by bank robbers and mobsters in movies, right?), and now, that information will be much more easily released to U.S. authorities.

The IRS is encouraging U.S. taxpayers with foreign accounts not currently in compliance with U.S. tax law to pursue the IRS Voluntary Disclosure Policy. Most people who opt to disclose information under this policy will not be pursued for criminal persecution.

Image: IRS.gov

April 15 is fast approaching — it’s just over a month away. And that means that some people are still getting their stuff together for taxes. But one question that gets asked every year is this one:

Should I hire someone else to prepare my taxes?

In many cases, you can do your own taxes. In fact, I did my own taxes while I was still a sole proprietorship. Schedule C and the Form SE really weren’t that onerous. If you have a simple return, such as a 1040 with a standard deduction, or even a limited amount of itemized deductions on Schedule A, you can do your taxes yourself and/or with the aid of tax preparation software. However, if you are adding more and more schedules and forms,  and if your taxes are becoming more complex , you might consider hiring a professional.

As I’ve started dabbling in investing, switched to a LLC and received foreign income, it’s become worth my while to hire an accountant to figure my taxes, especially since I was spending hours and hours looking up forms and instructions. Here are some indications that you might be better off having someone else do your taxes:

• You own your own business.
• You have significant gains or losses from investments (including sold assets, such as real estate).
• You have paid foreign income tax on foreign earnings.
• You have multiple sources of income (side businesses, rental income, etc.).
• You are unsure of the deductions and credits you are eligible for.
• You think you must pay the Alternative Minimum Tax.

It is a good idea to go over your return with your preparer, however, to get an idea of what he or she did. You should have an idea of taxes work, and what (and why) you are paying. But you don’t need to spend the hours it takes to do them yourself.

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