How Freelancers Can Prepare for Tax Season

The biggest fear many freelancers face each year is when tax season rolls around.

There are so many unanswered questions regarding taxes, spreadsheets and income statements.

And since this responsibility falls solely on our shoulders, it’s a scary thing. But not to worry, here are 4 tips to help you quickly and easily prep for tax season.

Don’t DIY your taxes to save a buck

This is one of the most common mistakes I see freelancers make. You try to bootstrap your business so you cut corners by filing your own taxes. In the mean time you’ve missed out on possibly thousands of dollars in tax savings, as well as potentially screwed up your tax return in the process.

Bootstrapping your business is all about spending money in the right places and cutting back on the non-essentials. I don’t think possibly getting in trouble with the IRS is on the “not important” list.

During the first year of running their own business, I always encourage solopreneurs to find a CPA or Tax Professional to help file their taxes. This way you can get a feel of how it’s supposed to be and the tax deductions you qualify for. Then next year you’ll be more equipped to file your own taxes if you chose to do so.

Start small and then incorporate later

When you start your business, it can be tempting to dive-in head first, but this is a not a good idea. It’s best to file your taxes as a sole-proprietor and then shift to an LLC or corporation later.

In the U.S. business owners can file for DBA (Doing Business As) and an Tax ID number, or EIN, for their business. This is a simpler step and doesn’t require hiring a lawyer like filing for an LLC would.

An advantage to having an EIN is when you fill out tax forms and other legal documents, you won’t have to hand out your Social Security number. This helps prevent any fraud or theft issues with your personal SS# as well as represents your business in a more professional light.

As your business grows and you learn more and more about running an organization (no matter how big or small), then you can make the decision to incorporate. Until then I suggest taking it slow.

If you feel like you want to become an LLC right now, in order to take advantages of tax savings and other benefits, you can still file as a sole-proprietor of the LLC. This is especially key for freelancers just starting out as a business of one.

To find out the best route for you, check out Independent Contractor, Sole Proprietor, and LLC Taxes: Explained in 100 Pages or Less by Mike Piper.

Create a checklist of deductions

As a self-employed individual you’re required to file a tax return if your gross earnings equal $400 or more. As such a Schedule C will have to be filled out with your personal tax return. All of your business expenses (and income) will fall into these categories.

• Advertising
• Car and truck expenses
• Commissions and fees
• Contract labor
• Depletion
• Depreciation
• Employee benefits programs
• Insurance (other than health insurance)
• Interest
• Mortgage
• Legal and professional services
• Office expenses
• Pension and profit-sharing plans
• Rent or lease
• Repairs and maint
• Supplies
• Taxes and licenses
• Travel, meals and entertainment
• Utilities
• Wages
• Other expenses

List out the expenses your business has paid out in the last year and put them into the appropriate category. This will make it SO much easier on you when it comes to meeting with the CPA. And you won’t have a big bill to pay a tax professional to do it for you.

Always pay yourself first

When you run your own business, and have to answer to multiple clients, it’s easy to pay all the bills first and forget about yourself. But if you want to make tax season a breeze, it’s vital you set aside money for taxes, business savings and even “fun money” for yourself.

You don’t want to work hard all year round and have nothing to show for it and end up with a huge tax bill you can’t pay. Open a separate bank account for your taxes and set aside at least 15% of your earnings from each payment you receive from clients.

Using these simple tips, you’ll be much better equipped to handle tax season and won’t have to fear the unknown.