Apr 13, 2015 - 3:00pm

A Taxing Situation: Emily’s Return Gets More Complicated

Part of an ongoing series on Emily, a rising entrepreneur 

When Emily started her graphic design business, she figured her tax situation would change — but she didn’t realize how much more costly and complicated it would become.

“It used to be really straightforward,” Emily says as she opens the folder with her completed tax return provided by an accountant. “I’d get a W-2 form from the agency in January, fill out my tax form and send it all in. But now, the whole process is so much more different.”

Emily had conscientiously made all four of her quarterly estimated tax payments. Writing out those checks each quarter really brought home just how much of her earnings she was paying out to the federal and state governments. The number was less noticeable in the past, when taxes were withheld from her employers’ paychecks.

Quarterly payments were only the first hurdle. Preparing the return was another matter. Emily sat down with the pile of 1099 income statements from her various clients, a box with her expense receipts and a blank Form 1040 from the IRS. She was way over her head – and she needed help.

So Emily asked around and a friend recommended she talk to Carole, a certified public accountant who specializes in small business and self-employed workers. She met with Carole and provided all her information; a few weeks later Carole presented her with a completed tax package.

Carole was straightforward in explaining the tax challenges of being self-employed. Emily would of course have to pay higher taxes, including a self-employment tax for Social Security and Medicare (“Will those even be around when I’m retired?” Emily wondered).

Emily’s confusion mounted as she had to consider the depreciation of the capital assets she had purchased for running her business. She bought a new laptop computer and scanner, which could both be expensed in the year of purchase. But her printer that she’d bought before she started working for herself would have to be depreciated over several years. She also had to estimate the time she spent using the equipment for work and how much time she spent using it for personal purposes, and could only deduct or expense (whichever appropriate) the business use portion

“Could they make it any more confusing?” she says. “It almost seems like they go out of their way to make it harder for people who want to start their own businesses.”

Even with Carole’s professional boost, Emily says she feels uneasy about her taxes. On the one hand, she’s confident that Carole did a careful job in handling her return. But she can’t shake the nagging sense that she might have missed something -- or that she might be targeted for an audit.

For example, she was able to claim a deduction for the home office she set up to work from, but she read on the Internet that home office deductions are one of the items that tax officials look at closely. Will that trigger an audit?

“I used to not worry too much about my tax return, but now I’m totally paranoid about it,” Emily says. “I mean, I don’t understand everything in the tax code, or how it might apply to me. What if something’s wrong in there? Am I taking too many deductions? Should I be taking more? What about those business lunches with client that I expensed? Are those a red flag? You feel like you always have to look over your shoulder, even if you haven’t done anything wrong.”

And, of course, her more complicated tax picture carries a cost. Carole’s fee was $700, which adds up to several billable hours for Emily. And the time spent dealing with a more complex tax picture is more time she wasn’t able to spend on building her business and serving her clients.

Emily recently came across a news article about tax reform, and the story noted that fixing the tax code was a priority for both Congress and the president. It also reported there had been no action. She found herself frustrated that while everyone was talking a good game, no one was doing anything to get it done.

“Right now, it seems like the only people who can understand all these things are the people who do it for a living, so unless you have a really easy tax situation, you’re going to have to get someone to do it for you,” she adds. “And it’s only going to get more complicated if my business grows the way I hope it will.”

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