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Six Tax Tips For The Creative Freelancer

2014 March 2
by Contributor

creativeAs a right-brained creative, your innovative ideas rank second only to your lack of accounting skills. If you are worried about being flagged by the IRS or if you have already received a notice of deficiency, you need to be aware of these tax defense tactics for the freelancing professional.

1. Run a Business, Not a Hobby

To be considered a professional artist, writer or entertainer within the eyes of the IRS, you need to make a profit in at least three out of every five years. Otherwise, the tax examiner will think you are claiming deductions on a hobby instead of an enterprise

The goal may be tough when you are starting out, but you have options even if you fail. You just need to prove that you intended to make a profit; that you live off the income you receive; that you’ve tried to increase profits; and that you expect your work to be profitable in the future. You can help your case by showing expertise in the field; establishing that the type of business has been profitable for others; and demonstrating that you have made money from similar activities in the past.

2. Live Within Your Means

IRS agents watch the news, read tabloids and gossip like anyone else. They also know about current scams. If you’re famous and under-claiming income, watch out. If you haven’t yet been discovered but you’re supposedly affording a Manhattan high-rise on $20,000 a year, also watch out. Auditors love to pick on musicians and artists who hide their money or claim deductions that don’t apply. If you are cheating the federal government, not even a good tax defense will keep you out of trouble.

3. Consider Your Operating Structure

Are you working as a sole proprietor, a partnership, a limited liability company or a corporation? Don’t let the legal talk scare you. Just know that freelancers who file income on Schedule C of their personal returns are twice as likely to be audited as corporations, according to the National Association for the Self-Employed. About a third of uncollected tax debt has been linked to self-employed individuals, so the IRS is on the lookout for fraudulent tax returns.

4. Be Cautious About Hiring Relatives

You may qualify for certain business deductions if you hire a child, parent or spouse. Just make sure that your new employee really is a member of your team and not a source of cheap labor. You must treat your relatives as you would any other employees. You should prepare a job description with detailed professional responsibilities; have a written agreement for work schedules and pay; log hours worked; and keep payment receipts.

5. Watch Your Deductions

The IRS knows about lucrative write-offs related to home offices, travel, entertainment and vehicles. Because so many con artists have abused these deductions, you now have to work extra hard to prove your expenses are legitimate. Keep detailed records, such as meeting agendas, receipts and mileage logs.

6. Stay connected

The good news is that the IRS audits less than 5 percent of business returns and less than 2 percent of personal returns. Even better news is that a good CPA or attorney can handle most of the details for you and keep you out of trouble. Add a tax defense specialist to your network of business contacts, and you should never fear about getting into trouble with the IRS.

About the author: Mary Sutton is a Senior Writer for Fertile Content and a frequent guest contributor to many blogs Google+

Image License: Creative Commons image source

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