You work hard to make your money… don’t let this be you!
Let’s get to it.
1. Reporting your net revenue instead of gross revenue
Developers who are in the App Store, Google Play Store, or who sell via Stripe, PayPal, Square, or other vendors, are likely to receive a 1099-K from them at the end of the year.
(The rule is they have to send you one if you did over $20k gross and had at least 200 transactions.)
That 1099-K is important because it gets sent to the IRS. So they’ll very easily know if you’re reported your income from those sources correctly.
The number that the IRS sees as “income” is the gross revenue, i.e. before merchant fees, refunds, returns, shipping fees, conversions, etc.
So you need to make sure to calculate that out yourself (or have your tax accountant do it for you).
So for example, as you know Apple takes 30% from all developers.
What some developers do is report the NET revenue (i.e. after Apple’s cut). That is incorrect, and could lead to a hefty tax bill a few years down the road.
Instead, you should report to the IRS your gross income, i.e. whatever was reported on 1099-K.
Then, to make sure you don’t pay taxes on all that “extra” income, show deductions/expenses for that 30%.
One line can do it, “platform expense” “distribution expense” “third party expense” etc. Whatever you or your accountant wants to call it.
It’s a real expense. It really does count as a business expense and deduction. But you have to make sure both the expense and the income get reported.
2. Not deducting all the business expenses you legally deserve
This is incredibly important, because business expenses reduce both your income tax and the self-employment tax.
Don’t be afraid of counting business expenses.
Here’s a list to get you thinking:
Cabs, subways, buses
Books, magazines, reference material
Office rent (or home office deduction)
Gas and electric
Memberships to professional organizations
Messengers, private mail carriers, postage
Business meals and entertainment
Legal and professional fees
Travel and hotel
Advertising and marketing
Unpaid invoices (if you do accrual accounting)
Professional development (conferences, classes, etc.)
Health insurance premiums
3. Not making quarterly estimated tax payments
This is brutal. It is such an easy thing to do.
Here’s the thing: everyone already makes estimated tax payment.
You’re just accustomed to your employer withholding your taxes and doing it for you.
So if you don’t have an employer to do you that favor, you have to make quarterly estimated tax payments.
“But how much do I need to pay?”
I’ll show you! It’s really easy.
Find your tax return from last year and come back here.
Step #1: Find your form 1040 or 1040EZ.
Step #2: Find the line where it says “This is your total tax”. That’s line 63 on a 1040 and line 12 on a 1040EZ.
Step #3: Divide that number by 4. That’s your quarterly tax payment.
(There is ONE exception to this rule: find your adjusted gross income (AGI) on line 37 in a 1040 or line 4 in a 1040EZ. If your AGI is > $150k, multiple #3 by 1.1. That’s your quarterly tax payment)
Quarterly estimated tax payments are due on April 15th, June 15, September 15th, and January 15th.
You might hear about another rule that’s 90% of your current year’s tax, or annualized income calculations… whatever. Sure, there are other rules to do estimated tax payments.
This one though is simple and will not fail you. If you make your quarterly estimated payments, and they add up to at least 100% (110% for our one exception above if you made more than $150k) of the taxes you paid in the prior year, you won’t be penalized for late quarterly payments.
4. Not Keeping Receipts
In an IRS audit a credit card statement is not enough. The IRS will want to know the item that was purchased, not just who the vendor is.
That said, the IRS doesn’t require you to keep receipts that are less than $75.
5. Misclassifying employees and independent contractors
If you’re a developer paying another, remote developer for some help, he/she is probably an independent contractor. Especially if it’s a temporary gig, they’re using their own equipment, and you’re not telling them exactly how to do the job.
Misclassifying an employee or contractor can have horrible consequences. The employee can report you to the employment authorities.
And if for some reason the employee doesn’t report you and just doesn’t know, they’ll get a hefty extra bill at the end of the year when they find out that you haven’t been withholding taxes for them.
Don’t mess this one up.
6. Not asking for W9s when hiring contractors
Related to #4: when you hire someone, and especially before you pay them, make sure to get a W9. This is what gives you all the information necessary to provide the contractor a 1099 at the end of the year.
If you don’t get a W9 and the contractor, worst case scenario, goes crazy on you, you might not have their social security number or EIN, which is possible to overcome but is just an extra headache.
Just ask for the W9 when you start working together, and put it in a while with all the other W9s from the contractors you’ve hired for the end of the year.
7. Mixing Business and personal accounts and expenses
Strictly speaking this isn’t necessary unless you’ve formed an entity. But even if it’s just you, keeping your books separate will help SO MUCH in keeping track of what’s for your business, and what’s personal.
Why does this matter?
Because from point #2, you don’t want to underreport your business expenses. Every $1 of expense you don’t report can mean losing $.50 or more in real, after-tax money.
Keeping your books separate insures that you get ALL your business expenses included when you do your taxes at the end of the year.
Pro Tip: If you don’t do this, or do this badly, go through ALL your personal bank and credit card statements at the end of the year. Find anything that might be related to your business.
My wife does this every year with her wedding photography business and inevitably finds a few business expenses that she otherwise would have forgotten to report as part of the business.
8. Not hiring a monthly bookkeeper
Sure, you only have 50 transactions a month and you could do this yourself every month, but do you actually do it?
Bookkeepers that compile transactions into financial statements (and do nothing more) can be found for relatively cheap. $20–40/hour, depending on where they’re located (and of course you can hire a remote bookkeeper).
This will 1. give you up-to-date information on how your business is actually performing, and 2. make your life so much easier come tax season.
Instead of worrying about whether you have all your expenses included, or downloading old credit card statements, or going through all your transactions (and finding things you should have gotten refunded!)… you just hand your tax accountant an income statement and a balance sheet. Bam!
9. Not hiring a tax accountant
Have you seen CPA websites? They’re horrible. That’s what happens when a CPA tries to roll their own tech.
That’s what your taxes look like to an accountant when you try to do them yourself.
If you’re a developer, you can definitely afford paying someone to do your taxes. Their rates are probably even lower than yours.
10. Paying for deductions when you don’t itemize
Charitable contributions are tax deductible, right?
They are if you “itemize your deductions”.
Choosing whether to itemize your deductions is a simple math problem. To itemize, your qualifying itemized deductions need to exceed your standard deduction, which for most people is one of the following:
Standard deduction for single taxpayers – $6,300
Standard deduction for married taxpayers filing a joint return – $12,600
Standard deduction for head of household taxpayers – $9,250
So if you’re single and don’t have more than $6,300 worth of itemized deductions to take, you will not save on your taxes by making a charitable contribution.
What are itemized deductions? The list is long and, frankly, complicated, but the main ones to be aware of (and that most people who itemize use) are:
- Mortgage interest on up to two homes
- State and local income taxes paid
- Medical expenses (after they exceed 10% of your adjusted gross income (AGI))
- Gambling losses, up to the extent of your gambling winnings
As a general rule, if you’ve itemized in the past, it’s likely you’ll itemize in the future. So just ask your accountant.
11. Not Buying Health Insurance
Under Obamacare you are legally are required to own health insurance.
If you don’t own insurance, you’ll pay the higher of
- household income, up to national average cost of a Bronze plan sold in the exchange
- $695 per adult, up to $2,085 per household
12. Not paying (or saving for) self-employment taxes
Self-employment taxes are just another name for the taxes that you and your previous employers paid together.
Except now that you’re the employee and the employer, you have to pay both. It’s ~15% of your annual profit, after all business expenses.
The good news is that if you paid attention to #10, you won’t suffer too much here. If nothing else, you won’t be penalized for paying late.
But self-employment taxes still surprise some people by the amount. They get to the end of the year and realize they haven’t saved quite enough.
So, every time you cash a check, set aside some for self-employment taxes at the end of the year.
13. Not paying “reasonable” wages to shareholders of an S-Corporation.
For you fancy pants who have S Corporations you need to make sure ou pay a reasonable salary to the owners.
You can’t, say, pay yourself $5,000 in salary for the year, then take a distribution of $150k to avoid the self-employment tax.
The IRS has come after this exact situation a lot lately, too. So avoid an audit by avoiding this situation altogether. Pay yourself a reasonable wage.
14. Not Taking Advantage of Self-Employment Retirement Plans
There are plans that you uniquely qualify for as a self-employed person without employees.
They’re awesome because they generally allow for much larger contributions than a typical 401(k).
Solo 401(k)s, and SEP IRAs, are your main options here.
15. Reporting too many losses
The IRS is happy to let you deduct business expenses if you’re really running a business.
But it won’t be happy if it finds out you’re working on a hobby, and trying to pass off the expenses as “business expenses”.
How do you avoid this? Basically, make sure to report at least some profit. You don’t have to do this every year, but more than 2 years in a row of repeated losses and the IRS will start to wonder whether you’re really a business.
And you really are a business. You have nothing to hide. So just make sure your business is profitable.