Submitting your tax returns: What mistakes do you need to avoid?

The upside to being a self-employed freelancer is that you get to be your own boss. The downside is that you also have to be your boss – plus your own human relations manager, business development manager and finance department.

As we approach tax season for the self-employed and the scramble to get everything in before the deadline begins, there’s nothing more humbling than realising your chief financial officer has made a grave error. And then realising you can’t sack them because you are indeed the CFO.

It could be a miscalculation on last year’s preliminary tax, missing receipts, an unclaimed credit or money outstanding from the tax account. Or, worse, a pile of scary looking letters from Revenue. Whatever the mistake, it could be costly.

Aside from ending up on Revenue’s published “name and shame” defaulters list, freelancers could be hit with financial penalties for not paying the right amount at the right time.

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Self-employed people not only have to file a tax return and pay off any outstanding balance from last year but they also have to pay the current year’s tax before the year technically ends. They have to work out how much preliminary tax they might owe for the current year. This includes the tax they have to pay on their income plus how much Pay Related Social Insurance and Universal Social Charge they need to add on top.

A freelancer’s preliminary tax amount is usually calculated as the 90 per cent of the tax due for that tax year, or 100 per cent of the tax due for the previous tax year – depending on whichever is equal to, or more than, the lowest amount. If payment is made by direct debit, it could be 105 per cent of the pre-proceeding year (the year before your last tax year) but not if that amount was €0 (nice try).

The deadline to pay preliminary tax for the current year and file a return for last year is October 31st but those who use the Revenue Online Service have until November 15th to get themselves sorted.

After that, late surcharges apply for those who didn’t file or pay on time, starting at an additional 5 per cent of your tax due (up to €12,695) if you get it sorted within two months of the deadline. If a freelancer waits longer to file, the penalty amount leaps to 10 per cent (up to €63,485). That’s not all, though. Outstanding amounts (including underestimated preliminary tax) will accrue daily interest until they are paid back, which means not staying on top of tax can get extremely expensive for sole traders.

It can be tough, however, for those who barely have enough time to get their so-called day job done, keep their clients or employers happy and promote their business to then suddenly switch into accountant mode.

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That’s why this week, Money Matters ran around for you and asked some freelance tax experts for their best tips to make “scary form season” as easy as possible.

Don’t hide

The tax deadline is approaching but you’re afraid to look at what you might owe in case you don’t have enough to pay. The bad news is that pretending it isn’t there won’t make it go away. Getting your accountant in the loop as soon as possible could make all the difference, advises Paul Russell of accounting firm Ardagh Consultants.

“Get your records to your accountant early so that you have advance warning of your tax liability and can plan better,” he said.

Your accountant can review your return and calculation, which will “give you an understanding of how tax is calculated and, therefore, an appreciation of how much of your income you need to set aside each month to cover the tax liabilities”.

By knowing how much you might be on the hook for come October or November, you can start to plan.

Russell said it’s important for freelancers to actively engage with an accountant before the deadline “so that you don’t get behind and fall into the trap of never being able to catch up with your tax liabilities”.

Don’t wait for the day before, he warned.

“The most common trap people fall into is leaving everything until the last minute. Your accounts and taxes should not be rushed – they should be planned and considered to ensure that they are accurate.”

Know what you can claim

Deductible expenses: the two favourite words of anyone trying to lower their total tax bill. It costs money to be self-employed as a sole trader and there are some expenses we are allowed to claim back by deducting them come tax time.

These include accountancy fees, interest on a loan to start the business, equipment costs and even a proportion of household utility bills if you work from home.

Kevin Barry from Barry Accountants stresses that people should know what they are entitled to claim for.

“Most people don’t take into account all their business expenses. Some can be easy to overlook if you don’t take into account everything you spend money on in order to make a profit in your business,” he said.

“For example, driving to your accountants from your house can be tax deductible.”

They shouldn’t get too carried away and start to claim everything they find a receipt for, though.

“The main issues we would come across would be trying to claim for expenses that are not relevant to their trade,” Russell said.

“For expenses to be allowable, they need to be wholly and exclusively necessary for the purpose of the trade. We still find people trying to claim for things like bins, mortgage interest, all of their home light and heat, all travel expenses, lunches, coffees, etc.”

This means if freelancers cannot prove the expense was 100 per cent needed and used for their business, they may not be able to claim 100 per cent of the cost. If the expense was used for personal benefit, you might be in trouble.

Chartered Accountant Fionnan Ryan advises using “common sense” when it comes to what expenses should be claimed.

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“If you are a freelance set designer and live in Chapelizod and need to go to Cork Opera House for work, the travel expense is allowable. But if you go into the city centre on Saturday evening, that would not be allowable,” he said.

“Put yourself in the shoes of a person from Revenue quizzing you about particular expenditure. If you can prove to yourself that you needed it for your business, chances are it’s allowable.”

Aside from deductibles, Russell encourages freelancers to be focused “on the other tax credits that are available to all taxpayers such as medical expenses relief, home carers credit, rent tax credit and third level fees, etc”.

This includes the €500 rent credit introduced last year, which Ryan said some people could have missed out on.

If someone was in rental accommodation during the applicable years “even if only for part of the year – the credit will still apply”.

When it comes to claiming that trip to the dentist, however, make sure you read the fine print.

“One common misconception in relation to medical expenses is that dental expenses are all allowable. That is not the case as only specified dental expenses, as per Med2 form, are allowed,” Russell said

This means “effectively routine dental expenses for fillings, cleaning, etc, are not allowable”.

Have a system

Is a shoebox full of mangled receipts under the bed the only thing between you and all tax related harm? In the age of the smartphone, there should be no excuses for dodgy record keeping, Barry said.

“Almost everyone has a camera within arms reach and photographing bills or notes as soon as you get them is a great way of glancing back to see, ‘What did I spend that on?’

“We have an app that goes into an online account so that’s one less thing you have to think about. You just photograph and move on.”

For Ryan, the key to stress-free taxes for freelancers is simple – a separate bank account for business with a debit card.

“That way, you can track your income and expenditure,” he said.

“They should keep the money in this account to cover their tax bill or, better still, set up a direct debit.”

Given that freelancers’ income is “lumpy”, Ryan said, they can instruct their accountant to make one-off top up Revenue payments when times are good to take the pressure off when they are not.

The separate card comes in handy when working out what business expenses you can deduct from the personal ones you can’t, as “you capture all your expenditure with the debit card”.

“Sending an excel summary of the bank for the year will mean that the preparation of the return is so much easier,” Ryan said.

“The amount of freelancers that haven’t done this continues to surprise me.”