Taxes, You Better Learn to Love Them
One of the more obvious differences of freelancing compared to traditional 9-5 work is that your employer doesn’t take the taxes out of your paychecks for you. This means you need to do your own taxes; a bummer for sure, but it also means you could potentially save a lot more money than your full-time counterparts. You don’t need to be an accounting whiz to take advantage of these potential benefits and avoid the potential inconveniences.
BANK ACCOUNTS & WRITE-OFFS
Freelancers don’t have the luxury of an employer that withholds taxes. You’ll have to do this on your own. One of the first steps in helping you accomplish that is to create a separate bank account for taxes. A separate account just for taxes will ensure you always have the money Uncle Sam needs when he comes knocking. You would do well to deposit 20% of every pay check into a tax account just to be sure you’re covered when tax day rolls around.
A tax account isn’t the only one you should be opening. Having a separate business bank account, and in cases where it makes sense, a business credit card, go a long way towards easier freelance financial management. All income pertaining to your business can go through this account and all expenses pertaining to your business can be paid by your credit card. Separating your business’ cash flow from your personal one not only helps you track and visualize your spending to better budget yourself, it also allows you to more easily file taxes.
When filing taxes you can “write off” certain expenses that pertain to your business. As a freelancer, your work and life are intrinsically intertwined, which means there are a lot of purchases that can be written off as a business expense. You bought a new iPad? Tax write off. You took a trip to visit clients? Write Off! You had dinner with a friend who happens to work in the same field as you? Maybe a write off. The point is, as an independent contractor you can receive a lot of money in your tax returns because many of your expenses can be written off. Become informed as to what’s a tax write off and keep track of every expense that could potentially be one. This means that you should be using your business credit card for expenses you want to later write off. As long as you’re responsible with paying off your credit card on time, you should be fine.
BOOKKEEPING & FILING
Put aside 30 to 60 minutes every week to update your paperwork — invoices, receipts, overdue payments, business expenses, and the like. Otherwise, it will build up and become overwhelming. Get yourself a coffee, sit down someplace comfortable, and make sure to get this done. Choose the system you use to organize your finances wisely. There are many out there: Quicken, Mint, Steady, or just good old fashion Excel or Google Sheets. Whatever system works best for you. Keep track of every client, every project for every client, what you spent to accomplish each project, what you received in income for each project, the date you invoiced, the date you were paid, and as much other detail you can think of.
Having all your necessary paperwork organized will make the process of filing your taxes far easier. The stress of tax day often comes from the need to find that piece of paper that fell out of our bag 8 months ago and was chewed on by the dog before we put it in a drawer in the room we never go in. The most important forms for a freelancer to keep track of are 1099s. These forms are the record of payment each client gave to you in exchange for work. You will get one 1099 form from every client you’ve done work for that year. They’re required to send this form to you by January 31st every year. Clients are only required to send you a 1099 if you’ve done more than $600 dollars of work for them, but even if you did less than $600, the IRS still wants to know about it. Keep documents clarifying all of your income no matter how small.
GETTING PROFESSIONAL HELP
Just because you’re a freelancer doesn’t mean you need to do everything yourself. Taxes are a complex process and getting professional assistance is well worth it. You don’t need to have a personal accountant on standby. Pay an account once a year to help you file your taxes, ask any questions about processes you’re confused about, and get some general business advice. Accountants’ expertise gives them insight you’ll never see and can provide great financial advice like building credit for freelancers can be difficult, but your tax returns and bank statements can be used to show creditors, provided you’ve saved well. Taking out a line of business credit isn’t always so easy, but can be beneficial as there are promotional interest rate opportunities. Bet you didn’t know any of that.
When looking for an accountant, you would do well to find someone familiar with freelancing; the legal landscape (it can vary state to state), potential deductions, little known fees or penalties, etc. Ask other freelancers you know. They may have an accountant they love. By the way, don’t be afraid to ask freelance friends for financial advice. Forget about the taboos of money talk. They could help you avoid mistakes they’ve made in the past.
Taxes are scary for everyone, but they don’t need to be as daunting as they are. All it takes is some financial insight and some common-sense habits.