I’m not an accountant, but I have seen the movie and written about a few in my books. Not that any of those things make me an expert, but I have filed my own taxes as a freelancer and author for the last 10 years or so, and for five of those I had no “traditional income” from an employer: I started with only stacks of 1099 forms and a list of business expenses.
Before you panic thinking I am going to launch into some professional jargon, don’t. I’ve got some solid, simple advice for you that might affect how you file this year, and will certainly affect how you look at the year ahead.
This used to mean getting out a shoebox, or a file box if you were really organized, and labeling and cataloging your receipts. It also meant sitting down with 1099’s and your company books and totaling up your income. Much of this can be done digitally now but gathering all of your data into one place is still a necessary task.
Note that small businesses have longer to file than individuals, and even though your individual return is actually the same as your small business return, you can take advantage of these extensions if you need more time to get your paperwork together,
You sit in front of a computer all day, and that computer should do some work for you. You should use a single debit or credit card (or a combination of the two) for business expenses. You can then use an accounting program that will track and categorize your expenses for you. These programs are not 100% accurate, so you should check them monthly to make sure expenses are properly labeled, but you can keep the manual tracking you have to do to a minimum.
You can then export these into a spreadsheet to share with your accountant or import them directly into your tax software when tax time comes around.
Where You Work
There are many different places you can work if you are an author or freelancer, from coffee shops and libraries to your own office at home or outside of your residence. When choosing where you will do your work, taxes should factor into it.
Home: Even if you work at coffee shops and libraries, you should also have a home office if possible. For one thing, you will be more productive in a structured environment, even one you have created yourself. The second is that you can write off a part of your expenses including mortgage, rent, and utilities as business expenses.
A few things you should keep in mind about your office expenses, especially if you are a new homeowner:
- Don’t Overspend. You may be tempted to buy a new desk and totally revamp your office, but not only are you limited on how much you can deduct, but you also need to stay within your business budget. Resist temptation and be patient, doing things as you can afford them.
- Get Good Insurance. You will need good renters insurance that is enough to replace all of your items in case something goes wrong. Be sure you have enough in savings to cover the deductible so you can get back to work as soon as possible.
- Save for Unexpected Expenses. Just as your household budget should include emergency savings, so should your business account. This should be enough to cover your operating expenses including the salary you pay yourself for approximately three months.
- Keep Records of Everything. Printer ink. Paper. Batteries for your mouse and other computer accessories. Carpet cleaning and other cleaning supplies. Upgrades to furniture and decorations. All of these are deductible.
Even though you should be careful not to overspend, once you do undertake improvements and remodels, be sure to take advantage of the tax benefits that offers.
Commercial Space: Some freelancers do not work as well at home and find it to be distracting. You can office share or use other creative ways to rent your own commercial space. The best thing about a commercial office is that all of those expenses are deductible, and they are easy to keep separate. Remember to include all of the expenses related to an outside office when doing your taxes, including your commuting time and mileage.
Health Insurance Coverage
One of the toughest things about being an author or a freelancer ins finding and keeping health insurance, especially if you are not covered by a spouse or significant other. You have a couple of choices.
Individual Coverage: You can use an insurance agent or even on your own search for individual coverage. With the ACA, there are some tax credits available if you do so, but that may change under the current administration.
This is still more expensive than group coverage, but you can choose if you want a lower premium and a higher deductible plan supplemented by a health savings account, or a more traditional insurance plan with co-pays and lower out of pocket costs in the case of an emergency.
Group Coverage: Even if you do not have a regular employer, you can find group coverage. One of the best places to compare coverage and options for writers is Freelancer’s Union, although they do not have coverage in every state. However, there are insurance co-ops for contractors and other self-employed individuals, and you should search for those in your area.
Google has shut down its insurance comparison tool because it was not working well, but there are dozens of other places to compare insurance coverage, including healthcare.gov and private insurance comparison tools.
As a self-employed person, you need to provide your own retirement. You don’t have the benefit of an employer matching your contributions, but you should still donate the maximum amount allowed each year into a 401 K of some sort. You can choose either a Roth or a traditional IRA, depending on how old you are when you start, and what you anticipate you will need to retire and maintain the lifestyle you want.
Since you are self-employed, limits are higher for you as you can contribute as both your employer (since you employ yourself) and as an employee. Be sure to factor in these limits when deciding how to handle your taxes.
These contributions are tax deductible, as are other investments. A large consideration of how you invest for your retirement will depend on your tax situation, and how much you can afford to put towards it. Remember that as a freelancer, you will have to pay your own social security as well, and because you do not have an employer matching your costs it will be more expensive.
Tax Savings Accounts
More than likely you will owe taxes at the end of the year no matter how diligent you are with deductions, investments, and savings. To prepare for this, you need to have a tax savings account. You should save approximately 30% of your income, and make quarterly estimated tax payments. The self-employment tax is the combination of social security and medicare that an employer would normally contribute to you paying and is 15.3%. This is separate from income taxes, which is why you should save 30%.
The IRS demands that taxes be paid on money when it is made, so if you fall behind on quarterly payments not only will you have a huge bill at the end of the year, but you also may face penalties for not paying on time.
There are countless other tax tips and deductions for freelancers, but these are a few of the more common and often overlooked ones. As you prepare for tax time, be sure you are organized and know all of the deductions you have a right too. Use what you learn from preparing for your taxes this year to plan for next year.
While doing taxes is not fun, having a solid tax plan is essential to having a profitable business and being an effective entrepreneur.