Have you heard? The IRS announced the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15 to May 17, 2021.
Being a freelancer or solopreneur requires a lot of time and effort — and that’s before adding the complexity of filing taxes into the equation. For this reason, it is crucial to plan ahead instead of scrambling to get all your finances and documentation together the month before the tax filing deadline.
theBLOQparq (tBp) will serve as the future home for countless entrepreneurs. Rest assured, we will do everything in our power to support their dreams, to create collaborative spaces and to provide ongoing sources of inspiration. In true tBp fashion, we’ve put together a list of tips and tricks to help make tax season a little simpler and a lot less scary. Here are a few important things for every freelancer and solopreneur to keep in mind before tax season makes its entry.
Correctly classify your business
Deciding whether to classify your company as either a Limited Liability Company (LLC) or Sole Proprietor will have a different effect on your taxes. The main distinction between the two is that a sole proprietorship and the owners are one and the same, while a single-member LLC provides a divide between the two in both legal and tax matters. It’s important that freelancers and solopreneurs consult with an attorney or accountant to determine how their business should be classified as failing to make the right choice could result in overpaying taxes.
Claim all your income
As a freelancer, you’ll want to carefully track all of your invoices (detailing the deliverables) to know how much you’ve made from each of your clients. Make sure the income you report to the IRS matches the amount of income reported in the 1099s you received. Important: Even if a client doesn’t send out a 1099, you still need to report that income. Not doing so is a red flag and may lead to getting audited.
Understand your deductibles
Many freelancers miss out on valuable benefits because they aren’t sure of what they can and can’t deduct. According to a report by Xero, 35 percent of freelancers have a hard time understanding and paying taxes, and 73 percent don’t deduct any expenses at all. For this reason, It’s best to talk with a tax accountant specializing in 1099 contractors so that you avoid paying more than you should.
Common tax deductions for freelancers include:
- Home office space & office supplies
- Vehicle & travel expenses
- Internet & phone bills
- Health insurance
- Hardware & software
- Advertising materials
- Legal or professional services
- Contract labor
- Licenses & taxes
- Business meals
Keep adequate records
It is important to implement some sort of process or system from the very beginning. This will ensure your tax return is correct and that you are not leaving deductions on the table. As a freelancer, if you do not want to hire an accountant, it is recommended that you invest in a basic version of an accounting software. There are plenty of user friendly, inexpensive options such as QuickBooks, FreshBooks, Xero, Plooto, or Zoho Books to help keep track of all income and expenses.
Keep personal out of it
The easiest way to accomplish this is to get a separate bank account and credit card for your business and only use them for freelance and or work-related expenses. It makes it that much easier to organize receipts, track expenses and calculate your profits.
Pay on a quarterly basis
Just like having it taken out of a paycheck, the IRS prefers freelancers and small business owners to send in taxes as they earn money. Filing quarterly refers to sending a check 4 times a year — on April 15, June 15, October 15 and January 15 — based on an estimate of what you will owe at the end of the year. Generally, you can expect an average of 25 to 48 percent of your net business income to go towards tax. This is why keeping track of your business expenses is crucial.
Consider hiring a professional accountant
Some freelancers feel that going solo when it comes to their finances and taxes is right for them. However, there are those of us who believe it is worth the money to hire a sidekick — whether that’s an accountant or tax advisor or both — to help guide us on our superhero entrepreneurial endeavors.
“Your accountant should offer to do more than just prepare financial statements and do your taxes. If that’s all they offer to do, then they aren’t the right accountant for a small business.”
– Chandra Bhansali, co-founder and CEO of Accountants World
You should be confident in the fact that they always have your best interest in mind and that they know what they are talking about. Ask questions – the more the better. It is their job to educate and to guide you so that you can make the most informed decisions for your business. Seek their advice on things like whether you should take a bonus or delay it a year or if leasing a micro-space (like tBp offers) for your business as opposed to buying a larger retail space could save you money.
Your accountant should work with you throughout the year to:
- Track income and spending
- Ensure there are no cash flow problems
- Monitor your gross and net profits
- Evaluate (and re-evaluate) your business plan
- Determine how much to contribute to your retirement fund
Think ahead and envision your future.
As with everything in life, it is better to be prepared. Becoming a successful freelancer or solopreneur takes a lot of creativity and a lot of planning. One thing you can check off your agenda is finding the ideal location for your entrepreneurial endeavors. For those looking to achieve greatness and to be a part of something greater, there is no place better than tBp.