Think About This Investment Before You File Your Taxes
I spent a number of years as a freelance writer.
And I have to admit, there were some benefits in being my own boss. I definitely prefer a pair of jeans to a pair of pantyhose. Also, slipping out to the grocery store during the day cut my shopping time in half. My daily commute? Just a short walk down the hall to my office.
However, there’s one thing I don’t miss about freelancing — the paperwork.
Monthly invoices had to be issued to all my clients and payments had to be accounted for. Depending on the client, that involved tracking bank wire and PayPal account transfers, depositing checks and, in some cases, waiting weeks for checks issued in foreign currencies to clear.
Records of every penny spent on office supplies, postage, software, business trips and meals had to be maintained. Writing an annual check to the IRS is bad enough. As a freelancer, I was obligated to pay estimated taxes quarterly. At the end of the tax year, a few of my clients issued 1099 tax forms, while others didn’t. And, of course, all my income had to be properly accounted for.
It didn’t take me long to realize the benefit of owning a good business software program.
The demand for paperwork gets kicked up a notch
I was reminded of my escapades the other day, after reading an article about a proposed new tax law. Starting in 2012, some lawmakers are trying to get small businesses, freelancers and independent contractors to generate even more paperwork: They will have to issue 1099 tax forms to any vendor on which they spend $600 or more annually.
So for instance, if a small business occasionally buys pizza for its employees, it may have to issue a 1099 form to the local pizza parlor at the end of the year.
I started to envision what my records would look like if I were still freelancing. Would I have to issue 1099s for my hat and bubble gum expenditures?
Regardless of whether this proposed tax law is enacted or not, we’re living in an increasingly entrepreneurial age, as experienced workers strive to start their own firms.
It’s hard to know the official tally of independent workers in the United States. It’s not tracked regularly — the government jobs report only tracks company payrolls, while other organizations track temporary workers. But putting all the bits and pieces together, estimates suggest independent workers make up roughly 20% of the U.S. workforce. And this number continues to grow.
To have a higher degree of flexibility, employers are utilizing more independent contractors, temporary workers and freelancers. At the same time, more workers are heeding the call. It used to be that workers preferred a permanent employer in order to obtain health insurance and a more secure income stream.
But with the passage of the new health care law, health care insurance is less of an impediment for independent workers. A workforce that once felt a secure with its corporate employer has seen just how quickly that can be broken when corporate need a boost. After all, when you’re self-employed, the last person you’re going to lay off is yourself.
While the majority of U.S. citizens doesn’t have to sweat the quarterly nuisance of estimated taxes, we all have to face the music once a year.
At tax time, I’m always reminded of an old Morgan Stanley advertisement: “You must pay taxes. But there’s no law that says you gotta leave a tip.” But it’s hard to wade through the tax code. As one U.S. Congressman puts it: “Our tax code is so long, it makes War and Peace seem breezy.” It’s even harder to ensure you’re not leaving a tip when the tax code changes.
In these leaner economic times, no one wants to leave any money on the table. The swelling ranks of independent workers are finding better accounting solutions so they can get down to the real work at hand. And all of us will be looking for ways to demystify the pending changes to the tax code.
The handful of companies in the tax-prep industry that can make our taxes easier should have a captive audience for years to come.
P.S. — This is the kind of simple, no-nonsense approach I take to unearthing stocks in each issue of Stock of the Month. In this case, I found one company uniquely positioned to profit from our mounting financial management tasks. I highlighted the idea for my Stock of the Month subscribers, who have been profiting from this trend since late last year. To learn more about my advisory, visit this link.