Being your own Lady Boss is a dream! Setting your own schedule, striving after your personal goals, and creating your own destiny is something most people can only dream about. However, that dream never includes that fact that come April you are entirely responsible for calculating and paying your own taxes.
If you’re like many of us, you’ve experienced the overwhelming anxiety that comes with filing your own taxes and the deep wish that you had paid a little more attention in that Accounting 101 class in college. So, we want to save your nails from being chewed down to the point of no return and your body from sleepless nights by teaching you what every freelancer needs to know about taxes!
Organization is Your Best Friend
Though it can be tough to get used to, getting organized is the number one thing you need to do when it comes to being prepared for tax season. Put a plan in place to keep excellent records of both your business income and your business expenses.
In any other situation, your business income and the subsequent taxes on it are dealt with by your employer. Since you’re your own boss though, this is now your responsibility! It’s not enough to just add up the 1099 Form totals that you’ll receive from your clients. A 1099 Form is only issued if your total work for them totaled $600 or more. Most freelancers have many jobs for less than $600, and you’re responsible for keeping track of all of these payments.
The best way to keep track of your total income is to uniform the payment process. For example, if you have all of your clients pay you via online invoice, you can easily keep tabs on all of your payments. If it’s not a possibility to get all of your clients to pay you in the same fashion, then make sure that proof of all of the payments ends up in the same place. Determine one place that the receipts of all of your payments will end up. Whether it be an online folder on your computer or a physical folder in your home, you need to have one place that houses all of your records!
When working for yourself, you want to keep every penny of your hard earned money that you can. This can be done by keeping diligent records of all of the expenses your business has incurred. These expenses can be deducted from the amount you have to pay to the government. Deductible expenses include business cards, advertisements, business insurance, lawyer fees, rent on office space, business equipment such as computer, phone, camera and the repairs on said items, office supplies, travel costs, business meals with clients, etc. When you spend money on any of these items, keep the receipts and note the reason for the expense.
Quick tip: When it comes to meals or entertainment expenses, note who the meal was with and why it was business related.
Rather than stressing over not losing a single receipt or keeping them in pristine condition so that the ink doesn’t fade, think about uploading them in an app to help you stay organized! Apps like Expensify, Wave, and Shoeboxed let you take photos of your receipts and track your spending. They can also help you format your expenses into different files that you can provide to your tax preparer.
Ask an Expert!
Taxes are complicated. There, we said it! They are especially complicated for a freelancer, so there’s is nothing wrong with getting a little help from an expert! While the idea of having to pay someone to do your taxes might seem like a waste when you could figure it out on your own, the truth is that a tax professional can easily save you the money that they’re going to cost you, as well as the time and the headache of having to do your taxes on your own. It’s important to find someone who specializes in self-employment taxes– they’ll be able to save you far more than you could on your own in deductions with things you’ve never heard of before!
Opt to Pay Quarterly
While it may seem nice to not have to pay taxes all year, that bliss is quickly swept away by the reality of the IRS come April. Unless you were a responsible squirrel and saved for this day, you can find yourself in a sticky situation. Paying your taxes quarterly saves you the hassle of having to put money aside all year to pay your taxes!
To file quarterly taxes, you’ll need to use IRS Form-ES. Filing for quarterly taxes means that you’ll pay your estimated taxes by the 15th of every April, June, September and January. Your estimated taxes will be about 15% of your income every quarter. To make this process as seamless as possible, you can sign up with the Electronic Federal Tax Payment System, a free tax payment system provided by the US Department of Treasury that allows you to pay your taxes online via your desired account.
Want to learn more freelancing tips? Check out our Freelancer’s Guide to Budgeting!