What’s every freelancers most stressful time of the year? Tax time! It’s just around the corner and with it comes the stress and rush to prepare your taxes. You might be worried about paying too much or even worse, paying too little and winding up with penalties later on!
But tax time doesn’t have to be stressful. Turning to tax professionals, keeping good records, and whether you’re looking to maximize your refund or make sure you don’t overpay, we have 3 smart tax steps for you to follow to help you get ready to file your taxes as a freelancer.
(Full disclosure: this freelancer has two accounting degrees, but I am not a CPA and don’t work as a Tax Accountant. The advice in this article is not proper tax counsel, and should be reviewed under advisement with a CPA or EA)
Step One: Hire an Accountant
When in doubt, hire a professional! Hiring a CPA (certified public accountant) provides legal protection for your business. Occasionally, taxpayers can be subject to audits, where their tax returns are reviewed by the IRS to ensure that taxes have properly been paid. If you are selected for an audit, it’s crucial that you have the legal protection of a professional who prepared your return.
Your accountant won’t just try to have you pay the maximum amount, however; they’ll have ideas and strategies for how you can reduce your tax liability, legally.
When it comes to finding accountants, the best solution is usually to ask your trusted friends for a referral, especially if your friends are freelancers. You can find a CPA through directory services or by Googling, but a trusted recommendation will help you feel comfortable with the accountant’s work.
The fee that you’ll pay each year to an accountant is more than covered by the comfort of knowing that your taxes are properly prepared. In addition, an accountant can help you plan for your future tax situations and reduce your liability. In my own experience, understanding how to purchase equipment for my business helped me reinvest in the business and ultimately reduce my taxable income.
Everyone’s circumstances are different, so everyone’s tax return is different. I would recommend self-preparing only to the simplest of circumstances: salaried employees who receive a single W-2 from their company. That’s not the case for most freelancers, so it’s wise to hire someone who can prepare your taxes properly.
Step Two: Prepare Your Documentation
After you’ve selected an accountant, it’s time to start pulling together the information that they’ll need to help you file your return. Your accountant will really appreciate having good records and documentation to prepare the return.
Unfortunately, the work to gather your data should begin long before tax time. Using a tool or app that pulls all of your transactions together in a single place is really useful.
Tools like Mint, Wave, Xero, or even PayPal can help keep things organized.
For the items that you’re going to claim as an expense, make sure that you document the expense. That includes keeping receipts and invoices that show that a payment was made.
Here are some things you should pull together while preparing to hand off documents. Your accountant may not need all of them, but all are needed if you are audited:
- A summary of your freelance income and expenses that provides an overview of your business
- Documentation of income and expenses (particularly expenses!)
- All tax documents not related to your freelance business as well, such as tax forms for interest at banks and for your investments, W-2’s for example that are provided by an employer
Step Three: Start Planning for Next Year
While you were putting together your tax documentation, hopefully you saw some opportunities to improve your situation in subsequent tax years. Maybe you thought of a few expenses that you aren’t able to deduct because you forgot to properly document them. It’s a new year, and there’s never a better time to implement changes than early in the year.
This is also a great opportunity to review your business results. In preparing your income and expense statements, you effectively have your business financials reviewed and ready to analyze. You can use this to set goals for the next year and start putting plans in place to achieve them.
Also, set goals from a process standpoint. If it took you five hours to pull together all of your tax data this year, think about tools and approaches you can use to half that next year.
Filing your taxes doesn’t have to be the most stressful part of your freelance calendar. Use it as an opportunity to review your business results, and make sure to bring in a professional that eases your load and liability.