*Editor’s note: Tax season can be particularly confusing and/or difficult for new freelancers. In keeping with the spirit of the WritersDomain blog, we wanted to offer help for those who may be dealing with freelance taxes for the first time. The author and WritersDomain are NOT tax professionals, nor is either party legally able to offer official tax advice. The following post is the experience of one of our seasoned freelancers and are her opinions and experience only.
When I switched to freelance work from my job as an accountant, I knew that keeping track of my finances would be more important than ever before. I’ve always been nitpicky about budgeting and managing my money. However, freelance work brought quarterly tax payments into the equation, which is something I’d only done for established corporations in the past. Thankfully, I have experience in this area, so setting up a system has been a smooth process. I’m not a CPA, and you should always consult a tax professional about tax information you find on the internet. But here’s my process, which should work well for any freelance career.
1. Choose a bookkeeping software
You need a way to organize your finances, and bookkeeping software does all of the hard stuff for you. There are many different formats available, including online, desktop, and PC versions.
You can also find ones that have apps available for easy access from your phone or mobile device, which is essential if you’re constantly on the go.
I use Quickbooks for my business, but it’s a little more expensive than I’d like (my copy was a used one that someone else no longer needed). I like it because it gives me detailed reports and such, but a much simpler program like Outright might work just as well for someone who likes more of a hands-off approach.
2. Know your tax deductions
You should read up on these deductions yourself at the beginning of each year. Don’t expect your accountant to claim every deduction for you automatically. For one thing, a CPA isn’t a mind reader. They can’t possibly know what you spent throughout the year unless you have good records. Secondly, though a CPA will probably have your best interests in mind, no one cares as much about saving you money as you do. You need to be your own advocate. If you think something might be a deduction, categorize it properly, keep your receipts, and ask your CPA when tax time rolls around.
My deductions include a home office space, utilities, and advertising costs for my blog. There are many other deductions out there, too, though.
3. Categorize your transactions
If you want to be thorough and know where every last penny went for your freelance business, you can set up lots of categories for everything from utilities to advertising. For tax purposes, however, you really only need to know one thing—is it tax-deductible?
When you set up expense accounts in the software, you’ll usually have the option to link those accounts to line items on your Schedule C, which is the tax form you’ll use to file your federal taxes. If this is set up correctly, you can easily print out a Schedule C when tax time rolls around and simply hand it to your accountant or use it to file your taxes online. Some of the most common tax deductions for a freelancer are home office space, advertising, insurance, and office supplies. Most software programs already have these set up for you, so you don’t really need to know where they go on the tax forms; that information is normally stored in the software by the developer.
4. File quarterly taxes—or don’t
One of the most nerve-wracking aspects of owning your own business is that pesky quarterly tax payment. Many people ignore this completely, even though it can result in interest and penalties because they’re just not quite sure how it works.
It’s really pretty simple though. It’s just one form, and it doesn’t require a lot of information. You can follow the simple instructions on the sheet, use a regular calculator, and find out your estimated tax payment for that quarter. If that sounds too complicated, don’t worry—most accounting software has the ability to fill this form out for you. Again, just make sure your transactions are categorized correctly, and everything should be fine.
But wait—not everyone has to file quarterly tax payments. According to the IRS website, many people are exempt from this requirement. Look at last year’s tax return. What was your total tax liability? If it was $0, then you probably don’t need to file quarterly taxes this year. At more than $1,000, then you probably do. If you’re still confused or it’s your first year as a freelancer, you may need a CPA to help you figure it out.
5. Set up a separate bank account for your business
As a freelancer, you’ll probably have to pay self-employment taxes as well as income taxes. You should set up a separate bank account for your business income and set aside a percentage each time you’re paid.
The percentage varies from one business to the next, but 20-25% is a good rule of thumb. This should cover most or all of your taxes for your first year as a freelancer, and you’ll have a better idea of what to set aside once your first year of taxes is filed.
6. Let your CPA handle the tough stuff
Your CPA can easily handle the filing part for you, as long as you’ve kept good records. In fact, most CPAs can import your software data to their own computer and file your taxes online.
If you didn’t keep good records last year, don’t fret. Freelance writing is mostly done via the internet. It shouldn’t be too difficult to scrounge up all your receipts and statements. Your accountant can help you figure out the tax portion, and you can start fresh next year. If you have any questions, just ask them. Most CPAs are happy to help you out, since better organization and understanding on your part makes filing your taxes easier next year.
Most people assume that accounting requires advanced math skills, but that’s really not true. Bookkeeping is all basic arithmetic, which calculators can easily do for you. Organization is actually the most important part of a bookkeeping system as you prepare for freelance taxes. Keep your information organized, and tax time will be easy.
This article was written by one of our writers. The author’s views are entirely their own and may not reflect the views of WritersDomain.