Image courtesy of Arvind Balaraman / FreeDigitalPhotos.net
I’ve paid a tax professional to do my taxes only once. It was the first tax season after getting married, and I wanted to make sure they were done correctly. I remember sitting across the desk from a woman at a branch of a big name tax preparation company answering questions. After a better part of an hour, I noticed that she wasn’t just entering the information into a form on the computer, but the software was actually prompting her which questions to ask. I shared my observation with Vonnie on our way home, stating that I could have done that myself and saved the money we paid that day. For the next sixteen tax seasons, I did exactly that.
Starting the following year, I purchased tax preparation software and prepared my own taxes.
Our taxes have never been very complicated. We have multiple W-2s since we both work, and as the years passed we had kids and bought a house which bumped us into needing to itemize our deductions. Twice I had to report the sale of stock options from my employer, but they provided instructions on how to report those. That’s about as complicated as our taxes were for years.
Four years ago, however, I started freelance writing.
This meant 1099’s showing up in the mail at the end of January, declaring my own small business on my taxes and having to pay self-employment tax. I can deduct business expenses, but as I understand the rules, my expenses aren’t even close to the minimum amount needed.
I mentioned this in the company of some family over the weekend, which astonished them.
We started discussing some of the common things deducted for business use:
Computer: They thought I should be able to deduct the cost of my computer if I use it for writing. My understanding is that I could do so only if the sole use of the computer is for my writing, which is not true.
Home Office Space: They thought I should be able to deduct something for the use of my home office space for writing. Again, my understanding is that this is true only if the room used is only used for writing. This again is not true, so I determined I could not deduct anything for the use of that space.
They were skeptical of my interpretation of the tax law, and advised me to talk to a tax professional.
So, I stand at a crossroads as this year’s tax season begins. Part of me says that I’m good at reading and interpreting things so why spend the extra money to have someone look at our situation and tell me information I already know. The other part of me says that a tax professional could save us some money, and at the very least it would be worth it to have someone look over our information and make sure we’re handling everything correctly.
What do you think, EOD nation, would it be worth my time and energy to at talk to a tax professional? Do you do your own taxes or do you pay to have them done?
My husband is a fireman and I own my own business (Etsy shop) so we pay someone to file our taxes to make sure we get everything done correctly and we both know fully what all we can deduct as the tax laws change every year. For instance, you can actually write off your cell phone if employers contact you through that, internet, square footage of your home office, electricity (percentage in ratio to your home office), computer, etc. There are A LOT of things to write off to help you not owe as much. The only thing to keep in mind is that the IRS doesn’t like to see 3 years of a loss so just keep that in mind. Our accountant also tells us what NOT to write off that is usually a sign to the IRS to audit someone (like the square footage, etc.) so we don’t do that just on his recommendation and I didn’t need it. My overall recommendation: hire someone that gets good reviews. 🙂
Good advice, Cameon…..we’re asking around with friends and family for someone they’ve used and trust. If we do use a professional, it’ll definitely be someone that has come recommended! Thanks for your thoughts!
We are lucky in that we have a great tax guy who runs a private biz and does it fairly cheaply (we paid $130 this year). We’ve done the comparison thing, and our tax accountant’s version of our returns always get us more money back. I think if you can find a great guy/gal who charges a reasonable fee, it’d totally be worth it.
Holy crap! I need their name! Mine is $500!
You have to remember, Tonya, both Laurie and I are from the great state of Minnesota. You’ve got that whole West Coast price of living thing going on. 🙂
We’ve done some asking around, and most that have been recommended to use are in the $150 range, so your figure seems about right. Seeing as how the tax preparation software is around $60-$70, it’s a huge jump considering how important it is to get your taxes done right. Appreciate your perspective, Laurie!
We started paying to have our taxes done once our business took off as they just became too much for me to confidently handle as their are just too many moving parts now. I think if you can find someone that doesn’t work at one of the national chains that knows what they’re doing it can be well worth the cost, not to mention the peace of mind. That said, I still miss doing them as I got some sick twisted pleasure (at least that’s what my wife called it 😉 ) out of doing the work.
I’m concerned about you, John….I can’t say I’ve ever met someone that enjoyed doing their taxes. I normally descend into our basement for an afternoon of quiet while I pound through it. I hate every second of it. But hey, someone has to like doing taxes, right??? Glad to hear your business is successful enough to make your taxes complicated!
I am self-employed and we have rental properties, but we still do our own taxes. It is getting super complicated but I guess we are too cheap to pay someone =)
As long as you’re comfortable that you aren’t missing anything on your deductions, Holly I say go for it. I’m fairly confident that I’m doing them right…..but my wife isn’t so sure. This may be an exercise in verification…but I think it may be worth it.
I always did our U.S. taxes until we moved to Canada. The prospect of learning from scratch a new system, the requirement to file in both countries, and some other specifics of our situation that make our taxes complex pushed me over the edge. Though it’s expensive, I’m glad we’re paying a professional now.
This might be more work than you want to do Travis, but maybe just this year you could do your own taxes AND have them done professionally. You might find that the pro saved you enough tax to pay–in part or full–for preparation. But if the pro doesn’t do any better job than you, then it’s just a question of how you want to spend your time I think.
I thought about doing just that, Kurt. But I think I could get by with one or the other. My taxes should be relatively the same as they were last year (same deductions, W2’s etc). So, I would be able to quickly see what a professional did differently (if anything) by comparing last year’s with this years returns. Thanks for the suggestion, Kurt!
When you did your own taxes, did you use tax software or did you truly do it on your own? I’ve used Turbotax and TaxAct (I use the latter now because its far less expensive). I think those software programs should be pretty good for self-employment. They prompt you for questions like that.
Yup, I used TaxCut for many years, but switched over to TurboTax about three years ago. That’s why I’m fairly confident that I’m doing it right – between answering the questions, and my own research, everything looks cool. But, I worry because I know that the tax code is like a bazillion pages long so I’m afraid I’m missing out. Thanks for commenting!
You are right, the rules for home office are still strict. The room must be 100% business. Tough to do that.
The rest is simple. Schedule C. Expenses, such as web hosting, seminars, advertising, etc all reduce income. You need to pay SE tax (social security for both you and company, so 15%. The profit lets you open a solo 401(k), which lets you shelter quite a bit.
Keep reading until you’re comfortable with this. A tax guy who saves you a lot may either be brilliant or a bit shady.
The shady part is what scares me….I don’t want to claim some unused part of my house as my office assuming that nobody will ever find out, and then get audited and the book thrown at me. Thanks for the suggestion of the solo 401K…I’ll have to look more into that for 2014!
I was thinking about it too, but ended up doing it on my own. I guess an important input in the decision is how much it would cost you to get someone to do it for you.
Looks like it would be about $150 – maybe a little more, maybe a little less. That’s roughly double what the tax preparation software would cost me – but it’s not outrageous just to have a “spot check” to make sure I’m doing everything right. Thanks for weighing in!
I’m a freelancer so I’d never in a million years do my own taxes. Just the organizing alone takes forever! I do remember the good ol days when I did them myself though. I would say if it gets complicated or overwhelming, it’s worth hiring someone!
Suddenly I have this vision of you, a box full of papers and receipts and just dropping it with a “thud” on some guy’s desk, and then laughing. I do agree that the more complicated things get, the better off a person would be having someone else do it. My problem is, I’m afraid of what I don’t know – Is there something I’m missing, or is there not? Great to have you stop by, Tonya!
I’ve been self-employed for about 25 years. I was paying someone to do my taxes. They would have me fill out forms and bring them in. Then they would enter the numbers while I sat and watched. It cost about $300 plus, 15 years ago. I stopped when I realized the lines on the form matched up to what is in Turbo Tax. It usually takes me most of a day to complete them. We usually have a lot of medical expenses. So it takes a while. I usually give myself a reward for doing them like a pedicure which is a fraction of the amount that I’d be paying to tax preparer. I’ll be curious to see how others have made out.
Sounds exactly like my experience, K Hanson. When the tax preparer looks at the screen to read you a question, and then types in your response – then repeats the same process, you know they are not adding ANY value to what is going on. I think the software is tremendously helpful as well. Thanks for sharing your story!
I do ours, though I suspect I am like John S. and get some sick twisted pleasure in doing them. Actually, I did go to an accountant once. When I realized all he did was take my organized paperwork and plug in the numbers into a program, I decided it wasn’t worth it because I was actually doing 90% of the work. Yes, since then they have become even more complex (documenting & writing off HUGE medical expenses every year, being self-employed, to name a few areas); however, I found Turbo Tax extremely helpful.
If you have just a desk solely dedicated to your writing or running your business, that is a percentage of your home that isn’t used for anything else. OK – make a teeny, tiny percentage but, hey, isn’t that something you’ve learned writing your blogs — every little bit helps. I worked from home for 10 years, had a room dedicated to working, yet I stupidly didn’t take advantage of the tax write off. I figured since I was being reimbursed by my company for phone and internet, then what could I truly write off? 2 years after I retired from that job I found out I missed out on quite a bit to write off. Ouch! Yes, I found that out from a tax professional – one I casually mentioned it to at some family affair. He almost fainted when I told him. Nor does he let me forget it either.
So I started my answer by saying “keep doing it yourself” and now it appears I am finishing up my answer by recommending “see one for peace of mind”. Well, I’m no help! whoops
Well, thanks for being no help at all, Kathy..LOL. Just kidding. What you (and the other comments) are solidifying is that I’ll always wonder whether I’m missing out on a big deduction, so it may be worth it to at least have a professional look at it once. I can look at what he/she does differently, learn from it, and see if I feel comfortable duplicating it in future years. Thanks for commenting!
My husband is self-employed, and he pays someone to do his business taxes. There are so many picky little details, and he would have to sink far too much time into understanding and integrating them all. He is convinced that his accountant saves him money as well as time. You are not only working a day job and running a small business, you are also raising a family. For the sake of time – and even money – I vote you pay for the service.
That’s my fear, Prudence..that there are so many details, and hidden requirements or benefits that there’s no way I could untangle them all. Are you trying to insinuate that I’m a little busy??? 🙂
I currently pay for my taxes. We have a couple W-2’s, and my wife’s side business. It is not super complicated, but I do not think I would be able to get all the deductions that my taxman gets us. I feel that I am paying for piece of mind, which I think is worth the price of what I’m paying him. And also, this is his expertise, I cannot keep up with all the updated tax codes and changes every year. That’s what he’s good at. For me, it’s like if some of my patients are trying to keep up with the latest anesthesia practices. Yeah, you can, but would you trust yourself with it?
I would never try to do my taxes completely on my own, Ron – the tax preparation software does a good job of making sure it walks you through any new applicable tax code changes as you enter your information. I do identify with the “peace of mind” factor though..which is why I’m contemplating doing it – for at least one year. 🙂
How do you handle freelance gigs that you’ve never filled out tax forms for and were paid directly through paypal?
Great question, Stefanie….however all of my freelance jobs (all of which except for one pays through paypal) sends me a 1099-MISC. I think that there’s a question on the 1040 asking if you had any income that was not reported on a 1099 though, and that’s where you would likely report that. of course, these are the kind of questions that may require the services of a tax professional. 🙂
I’ll give you the same advice I’ve given clients, Travis. It all depends on how much you made freelancing. If it’s a healthy percentage of your income, then by all means. If the amount you’ll find in new deductions is eaten up by the cost of the pro, though, it doesn’t make much sense…..
It’s a fair amount of money…but it’s a chicken/egg problem. I don’t know how much I’d save in new deductions (which I don’t know what they may be) until I pay someone to figure that out for me. This is the dilemma I face, and why I’m thinking of having this done for one year just to see what would happen. Then, I could copy it in future years. That being said, given the comments, it seems to me I likely do not have any new deductions….at some point I’ll probably just flip a coin. LOL.
My taxes got exponentially more complicated this year with rental income from our basement rental, two 1099s I issued to my two writers, a 1099 I received, and finally small business income from the website. We are itemizing our taxes this year for the first itme as well. With all that being said, I trust Turbotax to ask me the right questions and get the taxes filed correctly. We’ve been “information gathering” the past couple months and one of these Saturdays we plan on just sitting down and getting it done.
As far as your home office, I would agree with your interpretation, except I think there is some leeway. For example if I worked on writing for 40 hours a week in my office and then spent some evenings in there doing personal things not related to writing I think you can still write it off. I know it’s an audit flag so it’s better to not claim it. Additionally with the laptop I would err towards not claiming it, plus I’m not sure a few hundred dollars in expenses is really worth writing off if it may raise a red flag. I did consider buying a tablet that would have been used 90% for small biz stuff, but decided against it.
Oh and TurboTax has a live chat option where you can talk to one of their tax CPAs. You can also call and talk to one if you need to. I would just run your two questions through the chat option and see what they say.
My sister has had a business for 9 years. She has a CPA doing her taxes and the first year she claimed her home office she got audited. She was not happy with it and was a real pain but she passed the audit and hasn’t had issues since then. She still goes to her CPA but she does a lot of the leg work before hand. I told her she could probably do her own taxes but she still likes consulting with her CPA.
That’s the other thing I’m afraid of….I’ve had my “blogging business” for a couple of years now, and if I all of a sudden claim a home office where I didn’t before I would wonder if an Audit would be in my future. That being said, if I did everything on the up and up, that shouldn’t be a problem (other than the pain in the butt that it would be). Thanks for sharing, Raquel!
Hmmm, I didn’t know about the Turbo Tax chat option. That could be huge. Thanks for the tip!
I believe the home office deduction has gotten more simple this year in that you can deduct it as $5 per square foot used as an office not to exceed 300 sq ft. I won’t put the link, but if you Google it, you can find the info on the IRS page. You do have to use that space exclusively for business, so sitting on the couch in the living room would not count. My accountant actually has a home office for his wife’s business. She sells and brokers sales of Native American art, so they have a room with only her art and stuff related to that. The room is not used for anything else. My daughter would negate that because she plays in every space in our house!
I do have an accountant. My taxes should get more simple after this year having sold my practice, but I’ll probably still keep him. He has given me so much good advice over the years, I think he’s saved us thousands of dollars. Many accountants would just do your taxes and tell you how much you owe or get back. Ours will email me and say something like if I shift $2000 from savings into in my HSA, we can qualify for XYZ tax credit that saves an extra $800 or something like that.
Unfortunately for me, my home office area is used for both my freelance writing and working from home as a software engineer. Looks less and less likely that I would be able to use it as a tax deduction. Sounds like you’ve found a good accountant – hang on to that one!!!