An accountant and a freelancer walk into a bar…
And immediately the freelancer begins berating the accountant with questions about her taxes. (Anticlimactic, I know).
You never knew an accountant was so intriguing until income tax season rolls around.
If you’re interested in doing freelance work, your taxes are going to be bit more complicated than the average person’s because your clients will most likely not be taking taxes out of your checks. That part is up to YOU at the end of the year and, believe me, you do not want to leave all the work of organizing your taxes and figuring out how much you owe for the days leading up to April 15th.
Instead, organize yourself throughout the year and when tax season comes, you’ll be sitting pretty because all your 1099 ducks are in a row. How can you do this? Follow these simple tips that will help you keep track of your income, your write-offs, and keep you aware of what you owe the government so you don’t forget that they get cut of all your lovely checks.
1. Keep spreadsheets, lots of them.
Google Drive is my best friend. I keep in there a sheet for everything I need to keep my work in order. Here are some spreadsheets you should be making:
- A spreadsheet for each client documenting your hours AS YOU COMPLETE THEM.
Does a client send you a quick project to look over during the day that takes you 2 hrs? When you’re done, immediately input that into that client’s sheet. You want to know all the hours you’ve worked for a client and on what project.
Include in the spreadsheet the date the work was done, the hours it took you to complete (including edits, email correspondence, and phone/Skype meetings), and a short description of what work those hours correspond to. Now, if a client forgets all the assignments they had you complete, you can accurately remind them (and get your money!).
- A spreadsheet of income and invoices.
Invoices, oooohhh, invoices. As a freelancer it’s on YOU to make sure you get paid for your work. That means sending invoices to your clients in a timely manner. Keep a spreadsheet that documents all the invoices you sent out, including columns for the invoice number, the client’s name, description of what work the invoice is for, the date the work was completed, the amount due, whether the invoice was sent, whether it was received, and then the check number when they do send you your pay.
Not only is this a great way to keep track of all the money you have coming in and the invoices you are waiting on or need to follow-up with, but it is also a great way to track your growth. How does this month’s income compare to last month’s? How does this month’s income compare to what you made this month last year? What are you doing differently that could account for this? These are all good things for you to know so you can track your growth and improve your business.
- A spreadsheet for business expenses.
As a freelancer, errrthang’s a write-off (as long as it pertains to your work). You purchased a new office chair? Write-off. You took a cab to a client meeting? Write-off. You had lunch at a fancy restaurant to impress that client? Write-off.
Keep track of all of your business expenses and KEEP ALL OF THE RECEIPTS. I’m all about saving paper but I like having the physical receipt in case I need to verify something with my records. I keep an envelope dedicated to storing the receipts of all my business expenses for that year. If you want to be even MORE organized, get a credit card that is exclusively for your business use, therefore you know all charges on that card are a write-off. I do a lot of online shopping for equipment or other things for my business. Charging those items on my business card and charging my own personal shopping on my other credit card helps me to separate those bills and easily keep track of everything Uncle Same is going to learn about at the end of the year (and give you money back on!).
2. Take your taxes out before Uncle Sam does.
To save myself the worry at the end of the year that I’ll be unpleasantly surprised by the amount of taxes I owe, I take 30% out of my checks and put it away in a separate account that I do not touch. That is tax money. Come tax time, I eFile my taxes and, boop, cut a check for the amount necessary which is already at-hand.
I put aside more than what I actually need to (after write-offs and what not), but then I just end up with extra savings. I learn to live on less, am not stressed about potentially not having enough to cover my income taxes, and usually end up with more than I need. Win-win-win.
3. 600 is your new lucky number,
Ideally, you’re doing projects that amount to greater than $600 for repeat clients because that’s just nice, steady money. But, if you work on something for a one-off client and the amount due does not exceed $600, there’s an upside. BOO DOESN’T HAVE TO DECLARE IT. That’s just money in your pocket. You don’t have to declare it, they don’t have to send you a 1099 Form, it’s all good.
Remember, this goes for $600 per employer, per year. If you did a $600 project for John Doe Productions and got paid December 30, 2014, and then another $600 project for them and got paid January 2, 2015 (and they never employ you again in 2015) you don’t have to declare either income because they were cashed in two different fiscal years. Boom. This system works in your favor.