Prematurely Adjusting Your Withholding Amount
Do not adjust your withholding if you have underspent the IRS. A critical facet of the 2018 tax code overhaul has been to lower the individual tax brackets to put more money into paychecks for workers during the year. The IRS issued new withholding tables telling employers how much tax to hold back on earnings from the workers.
Many workers have since seen their paychecks go up weekly, biweekly, or monthly. Those who haven't changed their withholding could be in for a surprise during the tax season and find themselves owing money to the IRS for having taken out too little tax over the year.
Keep in mind that if you adjust your withholding for the first time now, it will impact your 2020 taxes; it will not help with your return for 2019, which you will be filing this year. If you have not taken a look at your withholding since the tax reforms have taken place, it might be worthwhile.
Not Keeping Reliable Records of Expenses Linked to Business
One advantage of being a self-employed person is getting to deduct the costs incurred while earning money. So if you don't keep clear records of your spending, you risk being short on deductions that you are entitled to, or claiming the wrong inferences, and being subject to an IRS audit.
With 2020 in full swing, you have a prime opportunity to get organized on the record-keeping front. Find a system that works for you and start logging everything from the cost of business equipment and supplies to your vehicle's mileage, which you can deduct when driving for work purposes.
Not Paying Income Tax on Your Side Hustle
These days, side gigs are relatively common. However, the money you earn from them often won't be taxed up front. That's because side work is usually done on a freelance basis, meaning you're responsible for giving the IRS its share of your earnings. When you don't pay the IRS as you go, you'll face substantial fines coming in tax season. Instead, prepare to make projected quarterly tax payments in April, June, September, and January.
Balance these taxes into your budget at the same time. If you earn an extra $300 a month from a second job, don't spend it all before giving the IRS their share.
Not Capitalizing on Tax-Advantaged Savings Plans
There is a range of tax-advantaged savings plans out there which require tax-free contributions. Popular retirement accounts such as traditional IRAs and 401(k)s will enable you to set aside pre-tax dollars for your golden years, while health savings accounts (HSAs) allow you to allocate pre-tax money to spend on health care.
When you do not take advantage of these plans, you lose a good chance to lower your taxes. If your company provides a 401(k), sign up! If this isn't an option, open a separate IRA.
In the meantime, HSA coverage depends on being enrolled in a highly deductible health insurance program, so if your program is eligible, it pays to start making contributions. Any money that you put into one of these accounts is income that cannot be taxed by the IRS, meaning you can reap a lot of savings.
Not Setting up Tax Assistance Before Time Runs Out
The tax code is complicated. If your situation is complex — say you recently started a business, or have paid taxes in multiple states — it could pay to get a tax preparer's help to make sure you file your return correctly and don't miss out on significant tax breaks.
Beware, though: the longer you try to find the right person to do your taxes, the more likely it is they turn you down. Tax professionals are incredibly busy from late January onwards, so be prepared if you're planning to outsource your return late in the game.