The allure of freelancing lies in its flexibility and independence, allowing individuals to pursue their passions while managing their own time. However, freelancers often find themselves grappling with financial complexities, particularly when it comes to taxes. One of the most dreaded scenarios is receiving an unexpected tax bill. In this article, we’ll explore practical strategies that teach how freelancers can avoid surprising tax bills.
Understand Your Tax Obligations as a Freelancer
The first step to avoiding tax surprises is to gain a clear understanding of your tax obligations as a freelancer. This includes knowledge of self-employment taxes, income tax rates, and any deductions or credits you might be eligible for. Keep in mind that different states have varying tax regulations, so take the time to research and comprehend the tax laws that apply to you.
Make Estimated Quarterly Payments
Freelancers are often required to make estimated quarterly tax payments to the government. The IRS requires taxes to be paid as income is earned, so these payments help you stay current with your tax obligations and prevent a hefty tax bill at the end of the year. For 2023, quarterly tax payments are due on:
April 18, 2023
June 15, 2023
September 15, 2023
January 16, 2024
However, if you file your 2024 tax return by January 31, 2024, and pay your entire balance, you do not have to make the January 16th payment. Making these payments can be easier if you regularly set money aside. A general rule of thumb is to set aside 25-30% of your income for taxes, but this percentage may vary depending on your specific circumstances.
Stay Informed About Deductions
Freelancers are entitled to various tax deductions that can help lower their taxable income. These deductions could include home office expenses, equipment costs, travel expenses, and more. Research and stay informed about the deductions that apply to your industry and work-related expenses. However, make sure to accurately document and justify these expenses in case of an audit.
Maintain Accurate Records
Accurate record-keeping is crucial for freelancers to avoid tax surprises. Keep meticulous records of all your income and expenses. This can include invoices, receipts, contracts, and any communication related to your freelance work. Utilize accounting software or apps to help you organize your finances effectively.
Consider Incorporating Your Freelance Business
Depending on your situation, it might be beneficial to incorporate your freelance business. Different business structures have varying tax implications, and incorporation could provide you with opportunities to reduce your tax liability. Consult a tax professional or accountant to determine the most suitable business structure for your situation.
Hire a Tax Professional
Navigating the complexities of freelance taxes can be overwhelming. Hiring a qualified tax professional or accountant who specializes in working with freelancers can provide you with expert guidance and help you avoid surprises. They can assist with tax planning, ensuring you’re taking advantage of all available deductions, and help you stay compliant with tax laws. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
When it comes to taxes, the old adage “location, location, location” takes on a new meaning. State residency plays a significant role in determining the taxes you owe, as each state has its own tax laws, rates, and regulations. Things get even more tricky if you work and live in two different states. In this article, we’ll delve into the intricacies of how state residency affects taxes and why it’s crucial to understand these implications.
Defining State Residency
State residency refers to the place where an individual has established a permanent home and intends to return to when absent. It’s important to differentiate between domicile and physical presence. Domicile refers to the place you consider your permanent legal residence, while physical presence simply refers to your location at a given time.
Residency and Income Tax
One of the most notable ways state residency affects taxes is through state income tax. If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, you don’t need to worry about income taxes since these nine states do not impose one. The majority of states, however, levy income taxes, and whether you owe taxes in a particular state depends on your residency status, or where your domicile is. States employ different criteria to determine residency status, which can include factors like the amount of time spent in the state, the location of your primary home, voter registration, employment location, location of your children’s school, and driver’s license issuance.
Statutory Residents
Keep in mind that you may only have one domicile at a time, and it is where you will spend more than half of the year living. However, for those who consider two states home may be a resident of one and a statutory resident of the other. To figure out if you are considered a statutory resident, you can use the 183-day rule. If you have spent more than 183 days in one particular state, you are considered a statutory resident and may be liable for taxes in that state as well as your main state of residency.
Dual Residency
You may find yourself in a situation where you are considered a dual resident. Examples of this might include:
Living in one state, moving to another, and then moving back to the original state
Moving to another state without establishing domicile there
This means you’ll likely need to file tax returns in both states and pay taxes based on the portion of income earned while a resident of each state. Dual residency can lead to complex calculations, but it’s essential to accurately report your income and residency to avoid potential penalties.
Impact on Sales and Property Taxes
Income tax isn’t the only way state residency can affect your tax obligations. Some states have higher sales taxes or property taxes, which can impact your overall tax burden. Additionally, property tax rates can vary significantly between states, so choosing a state with favorable property tax laws might be an important consideration for homeowners. For example, Texas does not impose an income tax, but they have the sixth highest property tax rates in the U.S. in 2023.
Conclusion
State residency has a profound impact on your tax obligations, affecting everything from income taxes to property and sales taxes. Being aware of the residency rules and tax laws in the state you reside in or are considering moving to is vital for accurate tax reporting and minimizing your overall tax liability. As tax laws can be complex and subject to change, consulting with a tax professional or financial advisor can provide valuable insights tailored to your specific situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Life can sometimes throw us curveballs, and as a result, important tasks like filing tax returns can fall through the cracks. If you find yourself in a situation where you have past-due tax returns, it’s essential to address the issue promptly to avoid penalties and legal complications. In this article, we’ll walk you through a step-by-step guide on how to file those overdue tax returns and get your financial records back on track.
Step 1: Gather All Relevant Documents
Before you begin the process of filing past-due tax returns, gather all the necessary documents. You’ll need income documents, which typically include W-2 forms from employers and 1099 forms for other sources of income. If you misplaced or never received these documents, reach out to the issuing companies to obtain them. You can also request an IRS tax transcript. You should also gather records for deductions and credits. Some examples can include:
Retirement account statements to show proof of contributions
Education expense receipts
Medical bills
Donation slips
Property tax receipts
Mortgage or student loan interest statements
Finally, having previous tax returns and any other relevant financial information on hand will ensure accuracy when filling out your tax forms.
Step 2: Obtain and Fill Out the Required Tax Forms
Visit the IRS website to download the appropriate tax forms for the year(s) you need to file. Make sure you select the correct forms for the specific year(s) you’re filing for. If you are filing using tax software, be sure you purchase the software for the correct year(s) you need to file. Carefully fill out the tax forms using the information you’ve gathered. Be meticulous in providing accurate details to prevent errors and discrepancies. If you’re unsure about any information, seek guidance from tax professionals or consult the relevant tax guides for that year.
Step 3: Calculate Your Tax Liability and Know Your Options
Calculate your tax liability based on the information you’ve provided on the forms. If you are using tax software, this amount will be calculated for you based on the information you provide. If something doesn’t seem right with the populated amount, double check your information. Don’t forget to include any deductions or credits you are eligible for to potentially reduce your tax burden. Be thorough to ensure you’re paying the correct amount.
If you cannot afford your tax bill, don’t ignore the issue. The IRS offers many tax relief options, including installment agreements and offers in compromise. Research your options and consult with an experienced tax professional if necessary.
Step 4: Mail or E-File the Forms
Depending on the options available, you can either mail your completed forms or e-file them. E-filing is generally faster and more convenient, and it also reduces the chances of errors since the software will perform necessary calculations. If mailing, use certified mail to track the delivery and ensure your forms reach the tax authorities.
Step 5: Address Penalties and Interest
Late filing of tax returns often incurs penalties and interest on the unpaid taxes. Upon filing your overdue returns, the IRS will send you a notice detailing the penalties and interest you owe. It’s important to pay these amounts promptly to avoid further accumulation of charges. Keep in mind that the IRS offers penalty abatement. Look into these options to see if you can get your penalties reduced or removed.
Step 6: Seek Professional Help
If you’re overwhelmed by the process, consider seeking assistance from tax professionals. Enrolled agents, certified public accountants (CPAs), or tax attorneys have expertise in navigating complex tax situations. They can help you accurately file your past-due tax returns, communicate with tax authorities, and potentially negotiate penalties if applicable.
Step 7: Stay Organized Moving Forward
After successfully filing your past-due tax returns, make a commitment to stay organized when it comes to your taxes. Set up a system for keeping track of your financial documents throughout the year, making the tax-filing process smoother in the future.
Tax Help for Those with Past-Due Tax Returns
Filing past-due tax returns might seem like a daunting task, but with careful planning and organization, you can successfully navigate the process. Remember, the sooner you address overdue taxes, the better it will be for your financial well-being. By following this step-by-step guide, you’ll be well on your way to resolving the issue and ensuring compliance with tax regulations. If you’re unsure about any aspect of the process, don’t hesitate to seek professional advice to make the experience as smooth as possible. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
When it comes to running a business, one of the key goals is to minimize expenses and maximize profits. One often overlooked avenue for achieving this is by taking advantage of tax deductions. Section 179 of the Internal Revenue Code offers a powerful tool for business owners to significantly reduce their tax liability while investing in essential equipment and technology. In this article, we’ll break down the Section 179 deduction, how they work, and how you can leverage them to benefit your business’s bottom line.
Understanding Section 179 Deductions
Section 179 is a provision in the U.S. tax code that allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. This deduction is designed to encourage businesses to invest in themselves by providing an immediate tax break for capital expenditures. In other words, instead of depreciating the cost of these assets over several years, you can deduct the entire expense in the year you make the purchase.
Qualifying Assets
Not all assets are eligible for Section 179 deductions. The IRS defines eligible assets as tangible personal property used for business purposes. This includes machinery, equipment, vehicles, livestock, computers, and furniture. It also includes some intangible assets such as copyrights, patents, and software that is not custom-made. It’s important to note that the asset in question must be used more than 50% for business-related activities to qualify for the deduction.
Limits and Maximum Deductions
While Section 179 deductions can be incredibly advantageous, there are limits to how much you can deduct in a given tax year. For tax year 2023, the maximum deduction limit was $1,160,000, with a spending cap of $2,890,000. This means that if your business spends more than $2,890,000 on qualifying assets, the deduction begins to phase out dollar-for-dollar.
In addition, there are specific limitations on which vehicles for business use qualify. For example, there is a spending cap on heavy vehicles that weigh between 6,000 and 14,000 pounds. These typically include SUVs, pickup trucks, and commercial vans. In 2023, this cap is $28,900. All other eligible vehicles need to weigh under 6,000 pounds.
It’s also worth mentioning that real estate is not covered by Section 179 deductions, and neither are land or land improvements. However, there are a few exceptions, including:
Roofs
Fire alarms and other protective systems
Lodging property
Heating, ventilation, and air conditioning (HVAC) property
Conclusion
If you don’t qualify for Section 179 deductions, you might try bonus depreciation, which allows businesses to deduct a large percentage of the asset’s purchase price up front. However, the percentage will be decreasing each year per the Tax Cuts and Jobs Act of 2017. Taxpayers can depreciate 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For help figuring out what is best for your business, consider consulting a tax professional. Optima Tax Relief is the nation’s leading tax resolution firm for both individuals and businesses alike.
Crowdfunding is the act of funding a project by collecting small donations from a large number of individuals, often via the internet. GoFundMe is one of the most popular crowdfunding sites that provides a fundraising platform for just about anyone. From education campaigns to medical expenses, GoFundMe makes it easy to raise and collect funds for many causes. But like many other acts that result in free money, taxes are not often considered. Here’s a breakdown of how GoFundMe donations are taxed.
How do crowdfunding and GoFundMe work?
Crowdfunding sites, like GoFundMe, provide a way for people to solicit donations from friends, family members, and even strangers who want to support their cause. First, you’ll need to set up a campaign page with a title and description of your cause. You’ll also set a fundraising goal. Once your page is set up, you can share it with others through social media, email, and other channels. People who visit your campaign page can make donations directly through the GoFundMe platform. They do this by using their credit or debit cards, and sometimes third-party payment apps, like PayPal. Once you start receiving donations, you can withdraw the funds from your campaign, less any fees that the site charges.
Is crowdfunded money taxed?
The big question everyone wants to know is “Are these donations taxed?” Typically, donations are considered nontaxable gifts in the IRS’s eyes. However, there are a couple of exceptions that can cause the IRS to consider your crowdfunded money taxable income.
Crowdfunded money is taxable if your donors received something in return for their donations
If you offer something of value in exchange for a donation, this transaction could instead be viewed as a sale. Since profits from sales are taxed as income, the IRS would view the “donation” as taxable.
Crowdfunded money is taxable if an employer sets up the fund for their employee
In this scenario, because the fund was set up by an employer, it is considered additional income. This basically means it is taxed accordingly.
Crowdfunded money is taxable if someone organized the fund on behalf of someone else but does not give the funded money to them
In this scenario, the fund would be considered taxable income and would be added to the organizer’s gross income.
Of course, if you are crowdfunding for a business venture, instead of a personal cause like help with funeral expenses, the answer to this question can become very complicated. Consulting a tax professional is your best option if you are attempting to crowdfund for a business venture.
How do taxes on donations work?
What if you’re on the other side of the screen and you are the one making the donations? One key thing to remember is the IRS does not allow you to deduct crowdfunded contributions during tax time. In order to deduct donations, you have to deliver it to a qualified 501(c)3 organization. That said, most GoFundMe pages do not qualify. However, there is one more tax obligation to keep in mind if you donate large sums of money via crowdfunding. That is the federal gift tax.
The gift tax is a federal levy on gifts over a certain value. Gifts can include money, property, art, vehicles, and more. In 2023, the federal gift tax cap is $17,000. This means you can give a single person up to $17,000 without having to report it to the IRS. If you exceed the limit, you’ll need to file a federal gift tax return via IRS Form 709. However, just because you file this return doesn’t necessarily mean you’ll owe taxes on the gift. You technically won’t owe taxes until you’ve exhausted the lifetime exemption amount, which is $12.92 million in 2023. If and when you finally exhaust the lifetime limit, you’ll be subject to a gift tax rate from 18% to 40%, depending on how much you gifted.
Tax Help for Crowdfund Donors
The important thing to keep in mind here is that there are responsibilities on both sides of the aisle, whether you are the organizer of a crowdfunding campaign or a donor. If you are the organizer, always make sure to use the platform responsibly and transparently. Provide accurate information to donors about how their contributions will be used. If you are a donor, stay below the annual gift tax limit as often as possible. When you can’t, or when you finally exhaust the lifetime limit, make all the necessary tax filings and payments. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
We’ve been warned about the new 1099-K reporting thresholds for over a year now. However, there is one payment app that is not included in these new policy changes: Zelle. In this article, we’ll give an overview of Zelle, including its features, why it is not required to abide by the new thresholds, and if it’s the right payment app for you.
What are the new 1099-K reporting thresholds?
As part of the American Rescue Plan of 2021, the IRS announced some new reporting thresholds for Form 1099-K. Prior to 2023, Form 1099-K, otherwise known as the Payment Card and Third-Party Network Transactions form, is automatically sent out by financial institutions if you earned an aggregate amount of $20,000 in over 200 transactions for goods and services. They are using 2023 as yet another transition year. In tax year 2024, the threshold for IRS Form 1099-K will be $5,000. This increase will serve as a phase-in for the $600 threshold in the future.
What is Zelle?
Zelle is a digital payment network controlled by a group of banks. These include Bank of America, Capital One, JPMorgan Chase, Wells Fargo, U.S. Bank, and a few others. It allows users to send funds directly to other users, even if they do not have the same bank and even if their bank does not offer Zelle. All you need is the recipient’s email address or phone number to safely send money.
Why is Zelle exempt from the new 1099-K reporting thresholds?
So, why is Zelle exempt from this? The answer to this lies in the method they use to transfer funds. With apps like Venmo, PayPal or Etsy, you receive funds in exchange for goods and services. Then those funds are held in the app until you transfer the funds to your bank account. Zelle, on the other hand, does not hold funds. Instead, they do direct bank transfers between users and these transactions are not subject to the IRS’s 1099-K reporting requirements.
Can I switch to Zelle to avoid receiving a 1099-K?
Remember, just because you don’t receive a 1099-K for income earned, does not mean you are exempt from reporting your income to the IRS or paying taxes on it. The last thing you want is an IRS audit or worse: the IRS pursuing criminal charges for deliberate concealment of taxable income.
Tax Help for Those Who Use Zelle and Other Third-Party Payment Apps
Although we haven’t technically experienced the new change, it is already in effect. If you receive payments through third-party payment apps other than Zelle, you should expect to receive a 1099-K if you earned within the reporting threshold. If you currently collect payments for your small business through Zelle, you will not receive a 1099-K. But beware that this does not mean you are off the hook when it comes to paying taxes. It means you have the additional responsibility of calculating the income earned through Zelle and reporting this income to the IRS during tax time. Optima Tax Relief is the nation’s leading tax resolution firm.
