It’s mid-December. you now have exactly 4 months to shuffle off the paperwork to Uncle Sam for tax season. How many of you are prepared?
Here are a few tips to help get you prepared for one of the only two things that are certain in life.
Keep your receipts
This is one thing that I still let slip from time to time.
Anything that is business related, no matter how trivial it may seem at the time. While you may have been told that you can write off meals and events as business expenses, I want to advise you to do so sparingly. The IRS will notice if they see 1095 meal expenses – especially if you’re reporting a loss (like the majority of new freelancers).
Here are some of the things you can deduct:
Office Supplies – printer ink, paper, stamps
Insurance – if you’re completely self-employed and purchase health insurance, this is deductable
Advertising – business cards, web marketing (such as adwords)
Professional services – accountant, lawyer, consultants
Travel – business trips, conventions, auto mileage for business-related travel
Set aside for taxes
This is one that will get almost all new freelancers. When you’re starting out, you’re probably going to struggle for a bit – and every last penny counts. However, come April 15th, not having enough set aside for taxes can put you in even deeper waters!
Freelancing professionals (sole proprietors), if they turn a profit during the fiscal year, must not only pay income tax (25%), but a self-employment tax (15.3%) as well!
Set aside 30% if you anticipate a loss, slim profit, or want to owe less at the end of the year. Set aside 40% if you want to be safe!
Stay up-to-date with bookkeeping
I can’t tell you how many times Quickbooks has saved my bum.
However, I also can’t tell you how many times I let my bookkeeping slide for weeks and wound up having to play catch-up for 2 days straight. Don’t to this – do as I say, not as I do.
Nothing is worse than having to backtrack and dig through receipts, invoices, and payments. Set one day a week to do your weekly accounting, and you can avoid the headaches I have (not to mention the headaches you’ll give your accountant).
Did you know your computer is considered an “asset” by the IRS? So are your desk, chair, printer, software (yes, MS Office, too).
What does that mean? It means if it was expensive enough (like your computer and software like MS Office or Photoshop), instead of calculating the entire cost in one shot as an expense, you can file it as a “capital expense” and spread it out over a few years.
Why would you want to do this? In anticipation of next year’s taxes. If you do better next year and make more money (like we hope), calculating the depreciation value this year will give you a little extra offset on your earned income and that means a little less going back to Uncle Sam!
Hire an accountant
If this is your first year freelancing, hire an accountant. If you can’t afford a CPA, at least go down to the local H&R Block office to have someone take a look at all of your tax paperwork.
It’s not going to be cheap, but having someone who knows what they’re doing handle your taxes could both help you find deductions you never knew you could deduct, as well as keep you below the IRS’s radar