Actual masochists excepted, I’m pretty sure that not many people like tax season.
But freelancers and other self-employed people have good reason to like it even less than their W-2-employed, cubicle-dwelling neighbors. That’s because we’re taxed completely differently.
For one thing, we’re taxed on our net income – that is, our gross income minus our business expenses. So the paperwork tedium is slightly intensified for us, right out of the gate.
On top of the added hassle, we get hit with two different kinds of taxes, essentially: the income tax and the self-employment tax.
And don’t even get me started on the quarterly estimated tax.
Actually – wait. Do get me started, because this post is all about helping you, my freelancing friends, survive tax season with your sanity and hairlines intact. I don’t know if I can make tax prep fun, but I can at least help make it less painful.
#1: Understand Quarterly Estimated Taxes
Understand the quarterly estimated tax obligation, both when you have to make those payments and when you should make them.
Estimated tax payments actually work to your advantage, believe it or not! They help out harried freelancers — who, let’s face it, often see income fluctuate wildly throughout the year — by helping them avoid a last-minute need for a large sum of money to pay taxes on a year’s worth of income.
Instead, Uncle Sam helps you avoid the cash crunch by paying it in smaller chunks four times a year.
How do you find out your estimated tax payment liability? I’m so glad you asked, because it segues beautifully into me giving you what’s easily the most helpful tax resource link around — the IRS website’s portal for self-employed people. Seriously, bookmark that one.
And to determine your estimated tax obligation, use the worksheet in Form 1040ES (PDF).
#2: Maximize Your Deductions
Deductions reduce your tax obligation by allowing you to subtract reasonable and necessary business expenses from your taxable income. (Remember: we get taxed on income minus business expenses.) So it pays — literally! — to know what business expenses are deductible.
Things like mileage if you travel for work, phone and internet bills, computers and printers, office supplies, and continuing education are all potentially deductible. Also deductible are expenses for marketing, including website hosting, domain registration, advertising and so forth.
Perhaps the biggest, and most misunderstood deduction that freelancers should be taking advantage of is the home office deduction. It used to be true that the IRS heavily disfavored this deduction and successfully claiming it as a freelancer could open you up to audit.
Thankfully, that hasn’t been true in recent years. In fact, you can use a simplified version of the home office deduction nowadays, which should make it considerably easier for freelancers to complete their returns.
There are tons of possible deductions that could help lighten your tax burden. One of the best ways to track them is with a tool like Intuit Quickbook’s Business Deductions tracking function. Since it functions as part of your ongoing business books and ties directly to your expenditures, it makes identifying and working with deductions easy.
#3: Improve Your Record-Keeping
Keep the right kinds of records year-round. At the top of this list: accurate, up-to-date financial books. Whether you use an actual paper ledger, or something like Quickbooks, you’ll need to be able to keep an accurate accounting of all your income and expenditures.
You should also keep every receipt that might possibly support a potential deduction — and preferably someplace other than in a shoebox.
Whether you’re paperless, or just paper-less, you can use technology to improve your financial record-keeping and simplify your tax prep significantly. Invest in a good, easy to use scanner and get in the habit of scanning all paper receipts that you’ll need come tax-time.
#4: Look Ahead to Next Year Now
Get ahead of the game for next year. Staying organized is much easier than getting organized, as anyone who’s ever waited until the night before a term paper is due before writing it can attest.
In addition to shoring up your office and financial systems, you can take steps to reduce your tax liability. Look into starting a retirement account for yourself, if you don’t have one already. Set income goals or get a “financial check-up” from a business coach (and save the receipts, because it’ll be deductible).
Or check out area accountants who can help you implement tip #5 below …
#5: Talk to a Pro
Finally, if all else fails — or even if it doesn’t — consider hiring a professional.
Tax preparation isn’t exactly a simple process. As we’ve seen, it’s even more complicated when you’re a freelancer or otherwise self-employed. And every hour you spend preparing your own tax return is an hour you could spend doing actual billable work for your clients.
Viewed from that perspective, a qualified tax accountant with experience helping freelancers could pay for herself a few times over, saving you time, money, and sanity in the process.
Latest posts by Brenda Barron (see all)
- How to Find Freelance Writers at FreelanceMyWay - February 19, 2018
- The Importance of Happiness In The Workplace - January 18, 2018
- What Do The Beatles and Email Marketing Have in Common? - November 14, 2017