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Tax season comes with a lot of anxiety for some. The thought of gathering receipts, calculating expenses and printing account statements can be overwhelming. This process can be even more if a hassle if you are a freelancer or self-employed. In addition to my W-2 income acting work, as a model, I am considered a 1099 independent contractor.
Luckily there are financial benefits from being self- employed, like the ability to write-off work related expenses against your income. The downside comes at the end of the year when the realization that no taxes have been held from your checks means you may owe the government a hefty amount.
Organizing and tracking your finances throughout the year is key to making tax time go smoother, here are a few tips to help all of us freelancers prepare for tax season.
Track & Record Your Income and Expenses
Tax season is the optimum time to review or initiate a process of tracking your income and expenditures. This log can make it easy for you to estimate taxes throughout the year, get a snapshot of your annual income, and provide a well-organized cache of information. For tracking my income, I use a simple excel spreadsheet that allows me to see all the jobs I have booked. Once I receive my check, I then move the job from “Pending” to “Paid.”
For my expenses, I use the site Expensify, which tracks my expenses from my credit card purchases and allows me to create expense reports that I can use to prepare my taxes. I create my expense categories tailored to my business and log cash purchases.
An added feature is that app allows you to upload photos of my receipts with the expense, so I don’t have to keep to track of it. No receipt, no problem, Expensify offers eReciepts for transactions up to $75 imported by your credit cards that are accepted by the IRS.
Save For Your Taxes with a High-Interest Savings Account
When you are a freelancer, you may not get paid every two weeks like a salaried employee. When you get paid the last thing you want to think about is saving for your taxes for the next year. Trust me—it’s easier to set aside some money throughout the year as opposed to paying a massive tax bill in one lump sum in April. Use your prior year tax bill as a guide and then determine to how much you should be putting away each month or quarter.
I have a High Yield Savings account from American Express, which currently offers .90 % APY. Set up automatic transfers from your checking account, which can make saving so much easier.
Pay Quarterly Taxes
If saving for your annual tax return sounds less than desirable then you should consider paying your taxes on a quarterly basis. The IRS states that as a self-employed individual you are required to file an annual return and pay quarterly returns out that if you think you’re going to owe more than $1,000 come tax time.
The good news is that if you end up paying too much for a quarter, that payment will carry over to the next quarter and offset that amount. Neglecting to pay quarterly taxes as a freelance may result in a penalty from the IRS.
Don’t Forget Your Write-offs
Keeping track of your day to day expenses are essential, but don’t forget those write-offs that are allowed by the IRS when you are filing a Schedule C as a part of your tax returns. If you work from home, the room you designate as your home office can be written off as an expense. You can also claim business travel and meals such as plane and train tickets, cabs and rental cars – as well as hotel costs are all deductibles.
If you travel for business in your vehicle, you can deduct 56.5 cents per mile (commuting from home to your office doesn’t count). In most cases, meals are deducted at 50% of the total cost. Lastly, don’t forget to write off retirement contributions to your personal 401K or a SEP (Simplified Employee Pension). These contributions are tax deductible and typically depend on your income.
Use a Professional Accountant
When you are self-employed, your taxes are a bit more complicated than someone whose employer calculates and withholds taxes out of every paycheck. Because of this, it’s a good idea to find an accountant or financial advisor to help you manage your money throughout the year.
They can do everything from help you decide how much of your paycheck you need to put away, to preparing your annual tax return. Also, many cases an accountant will do the heavy lifting for you if you happen to get audited by the IRS.
How do you prepare for tax season? Do you have any helpful tips for my readers?