Good news, everyone: the IRS predicts that there will be fewer audits this year! Bad news: if you’re a freelancer, you’re still three times more likely to get audited than a big corporation. You might be thinking, Hey, what’s the IRS got against sole proprietors / my side hustle?
Spoiler alert: absolutely nothing. It just turns out that freelancers make more mistakes on their taxes. They’re not always huge mistakes — it might be as simple as rounding a number up or down a few dollars — but they’re enough to trigger some ringing alarms and flashing lights over at the IRS offices (I assume the IRS works out of a re-purposed fire station for this very reason).
If you’re a freelancer who is drowning in receipts and 1099 forms right about now, keep in mind this simple list of ways to avoid an audit this year.
1. Missing income
You may be dealing with a lot of 1099 forms coming in the mail, and it’s not hard to imagine losing a 1099 somewhere, especially if you’re not the most organized person in the world. However, even if it’s an honest mistake, the IRS may audit you if there is any income missing from your tax return. Also, pro tip to any of you who might be failing to report on purpose: the IRS already knows how much money you made, even if you didn’t receive a 1099.
2. Too many losses
It’s normal to report a loss — especially if, you know, you actually lost money — but big losses multiple years in a row can raise some eyebrows over at the IRS. Typically, if you report a loss in three out of the last five years, the IRS will make you prove that you’re a for-profit business. Make sure that everything you’re reporting as a loss is a legitimate loss and not a personal expense, and check out this IRS document for more information on the difference between a profession and a hobby.
3. Too many business expenses
A lot of freelancers are confused about what counts as a deduction, which can lead to problems with the IRS down the line. Just to be super clear: you can only deduct a purchase if it is ordinary and necessary to your line of work. For example, as a freelance journalist, you could deduct a laptop and digital audio recorder.
4. Having a home office
Claiming a home office deduction is an immediate red flag to the IRS because people abuse it a lot. The IRS has a pretty strict definition as what counts as a home office, and if you try to claim a deduction on, say, the makeshift office in your dining room, you’re going to have a tough time. Check out our article for more tips and tricks on how to claim a home office deduction.
5. Math errors and rounding numbers
If you’re doing your own taxes and calculating all of your own numbers, there’s a good chance you’ll forget to carry a one somewhere. Check and re-check your forms before sending them in to the IRS. Additionally, take a look at any numbers you may have rounded up or down. While you don’t need to report that deduction down to the last cent, it is suspicious if all of your numbers end in a bunch of zeros. Make sure you’re reporting the most accurate dollar amount you can.
While most freelancers don’t get audited, it’s good to be aware of the mistakes that can trigger an audit from the IRS (and if you do end up owing money to the IRS, it doesn’t have to be the end of the world). If you’re worried about your taxes, contact a qualified professional. While it may cost more money upfront, it can save you ton when it comes to peace of mind. Plus, you can deduct the cost.
Check out the PolicyGenius Freelance Center for more tax tips, insurance information, and other personal finance advice.
Image: Joe Hall