That time of the year is upon us again. The deadline for filing 2011 taxes is Monday, April 16, 2012. If you’re the type who is well-informed about tax deductions, careful about record keeping, and diligent about meeting deadlines, you have no reason to dread tax day. If that doesn’t describe you, don’t be stressed, but do get ready to take some positive action. When it comes to filing income tax, being proactive is everything. Fortunately, there’s still time to whip yourself into shape.

Who Gets Which Tax Forms?

If you’re an employee, at the time you’re hired you should fill out a Form W-4 for your employer. This tells the employer how much tax should be deducted from your paycheck. Your employer should give you a Form W-2 no later than January 31, showing how much money you earned and how much was deducted.

If you’re an independent contractor, at the time you’re hired you should fill out a Form W-9 for the person contracting your services. You are basically a self-employed individual who does your work in someone else’s space. The Form W-9 signifies to the Internal Revenue Service (IRS) that you are not subject to withholding, and that you are responsible for making your own tax payments to the federal and state revenue departments. Your employer should provide you with a Form 1099, a statement of how much you’ve earned, no later than January 31.

If you’re self-employed as a sole proprietor or in a partnership, or have your business incorporated, you are also responsible for making your own tax payments. 

Independent contractors and self-employed individuals should file quarterly estimated taxes, using Schedule SE (Self-Employment Tax).

The IRS is Your Friend

It might be stretching the truth just a little to say the IRS is your friend, but the folks there have actually made this process as painless as possible. You can download the necessary forms from their website, and you can file—and pay—electronically on the website at www.irs.gov.

The IRS has one of the most comprehensive, user-friendly websites on the Internet. Any piece of information you could possibly want from the tax code is there. Do you need to find out if you really are an independent contractor, or if you’re employing one? Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, will tell you. If you need to file for an extension, ask for a payment plan, or even ask the IRS to figure your taxes for you, it’s on the website.

The website also has a calendar so you’ll know what dates you are supposed to file your estimated quarterly tax, information on what’s deductible and what’s not, and everything else tax-wise that you need to know. You’ll do yourself a favor by becoming familiar with it.

Cut Your Tax Bill

If you’re preparing your own taxes, chances are that you’re missing some vital tax deductions—at least enough to pay a professional to prepare your return for you. According to the law, “The legal right of a taxpayer to decrease the amount of what would otherwise be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”¹ What is illegal is failing to file; even if you can’t pay what you owe, don’t fail to file on time.

So what items are tax deductible? Basically, anything that facilitates the operation of your business is fair game. Some are relatively obvious: advertising, office supplies, rent, and utilities. Others may not be so obvious, especially if you don’t consider yourself tax-savvy. For example, you’re allowed to deduct gifts of no more than $25 per person that you give to staff members and/or clients. If you send out $25 gift certificates to your regular clients for Christmas, or on their birthdays, that’s a deduction. So are client discounts; if you routinely or even periodically give $10 off to seniors, students, or others, that’s a deduction. If you extended credit to a client and she moved away without paying you, that’s a deduction. If you suffered damage to your property through theft or casualty, that’s a deduction.

Money spent on professional tax preparation is money well spent and deductible. If you’re ever audited, most tax preparers will go to the audit with you to explain your deductions, although some may charge an additional fee for doing so. Tax preparation companies like H&R Block and Jackson Hewitt sell audit insurance for a nominal fee that guarantees their assistance with an audit.

Bear in mind that if you’re an independent contractor, you may have as many tax deductions as a business owner. For tax purposes, you’re considered self-employed. If you’re an employee, you may not have as many deductions, but chances are you will still have some business-related expenses, such as your license renewal fees, the cost of continuing education, liability insurance, and even expenses related to job hunting.

Keeping Good Records

The key to taking any and all of the deductions listed above is being able to document them. That means you must save invoices, receipts, and anything that can attest to the fact that the purchase of a service, product, or piece of equipment, was for business purposes.

Many people are now running paperless offices. That’s fine, but if you choose to do so, you’ll need to scan all receipts and save them to your computer before shredding them. It’s important to back up your financial records regularly in any case, but if you’re running a paperless office, that practice is exponentially more important. You can use an online backup service, or save your files onto a flash drive or external hard drive, but the point is to do it frequently and consistently. The IRS agent doesn’t want to hear you say, “I lost all my files.” Failure to keep adequate documentation can cause disallowed deductions and cost you big bucks, including interest and penalties.

If you’re still using paper documentation, keeping that organized is not difficult to do, if you take the time to set up a system. My file cabinet contains hanging file folders with permanent plastic labels for each category. Each year, I drop an empty labeled file folder in the hanging file, and that’s where my receipts go. At the end of the year, I remove all the file folders and store them in a labeled cardboard file box. Nice and neat, and once you set it up, it requires no maintenance other than changing the folders out every year.

If you tend to casually throw receipts in a box or a drawer, just remember that if you’re ever audited and asked to produce the receipt for the ink cartridges you purchased or the association dues you paid, you could spend days looking for them. Save yourself the trouble and set up a system that makes sense to you.

The length of time the IRS requires you to keep tax records depends on the situation. In most circumstances, three years is acceptable. However, if you somehow failed to report income you should have reported, you better have those records dating back six years. If you’ve ever been deemed guilty of failing to file or filing a fraudulent return, you must keep records indefinitely. If you’re depreciating equipment or amortizing property, you should keep them until the period of limitations pertaining to the depreciation or amortization expires. If you claim a business loss due to a bad debt, you should keep records for six years. If you have employees, you must keep employee payment and tax records for a period of four years.

Keep your records in a safe place. An off-site storage business will store paper records in fireproof, climate-controlled security at a cost as low as $10 per year for a regular-sized file box. If you keep electronic records on a flash drive or external hard drive, invest in a fireproof file cabinet or fireproof lockbox for safekeeping.                

Be Prepared

When you’re an entrepreneur or an independent contractor, it’s easy to let taxes slip your mind. You don’t see them coming out of your paycheck every week or month. And that’s just the challenge: they’re not being deducted. It’s up to you to pay that tax. You have to remember that all that money isn’t yours; part of it belongs to the IRS. Get in the habit, each time you get paid, of setting aside the money to pay your taxes. If you deposit it in a savings account, it will draw a little interest until it’s time for you to pay. The tax bracket you’re in depends on how much money you make and your filing status, whether that’s single, married filing jointly, or head of household.

Tax brackets vary from 10 percent for a person making up to $12,250 if filing as head of household, to 39.5 percent for a head of household making in excess of $383,350. Most massage therapists are going to be in the range of 15–28 percent, depending on filing status. Personally, I don’t mind owing just a little in taxes at the end of the year. I don’t like loaning the government my money interest-free, so I don’t want to overpay. Putting aside 20–25 percent to pay taxes is probably a safe move for most of us. When it’s time to file, dig out those deductions, and hopefully they’ll bring your tax bill down substantially. Remember: it’s not illegal to avoid; it’s just illegal to evade.

Note

1. Gregory v. Helvering, 293 U.S. 465 (1935).