Don’t Let a Tax Refund Burn a Hole in Your Business—Use It Wisely!
If you were a savvy freelancer this past tax year, you may be anticipating a tax refund. If you are, congratulations! You deserve brownie points for getting your taxes filed ahead of schedule and for successfully meeting your tax obligations. Now the questions is what should you do with your refund? What you don’t want to do is consider the money that the IRS is returning to you as a windfall or an excuse to blow your budget. Instead, you’ll get more long-term satisfaction and benefit if you use your tax refund to fortify your freelance business in one (or more) of the following ways:
- Pay your back taxes – If you owe tax from prior years (and the IRS didn’t garnish this year’s refund to offset it) then now is the time to pay your back taxes—while you have the money in hand. Doing so will not only put your mind at ease, but it will also save you money in the long run by reducing the interest and penalty payments you are racking up on what you owe.
- Give back to your business – If you’ve been waiting to purchase new equipment for your business or to update your office space “when you have the money,” using your tax refund to finance these expenses can be a smart move. Depending on what you are planning to buy or do, you may be able to claim a tax deduction this tax year as long as you follow the IRS guidelines for business expense deductions and have proper documentation. You should be careful about deducting expenses that should really be depreciated as supplies (i.e. if the useful life of a piece of equipment such as a printer is greater than one year it would be considered a capital asset). When in doubt, contact a tax professional for assistance in this area.
- Build your skills – With the tax crunch now over, and your refund on its way, take some time to consider if there are any skills you would like to develop, or if there is any additional training you would like to pursue, in order to improve or expand the services you offer in your freelance business. Conducting a personal and professional inventory of what you need to do to reach your goals is a good practice for anyone, but for freelancers it is especially important, since you need to be in control of your own earning potential and financial destiny.
- Invest in your future financial security – Speaking of your financial destiny, as a freelancer it’s crucial that you plan ahead for your golden years. Using your tax refund represents to seed or shore up your retirement savings is a smart move. Since we’re still in the early part of the year, it’s unlikely that you have maxed out your 2016 IRA contribution limits ($5,500 if you’re under 50 years old or $6,500 if you’re age 50 or older), so take that refund and sock it away. Your future self will thank you for taking advantage of the compound interest—and you’ll relieve some of the pressure that your present self might be feeling about making retirement contributions throughout the year.
Granted, it’s good to know that you’ll be getting a tax refund rather than having to write a check to the United States Treasury, so enjoy feeling flush for a few minutes, then consider using the strategies above to create a strong financial foundation for you, and your freelance business.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.