This post is written by guest blogger Graham Hunter. Graham is a resident Tax Nerd at GoodApril, a tax planning solution for freelancers. GoodApril helps people save money and avoid April tax surprises.
Let’s say you spend your time making websites for local businesses. Or maybe you develop mobile apps for startup companies. As Biggie Smalls once wisely noted, if you’ve got more money, you’ve got more problems.
If you’re a freelancer, you probably already know the basics on the special tax rules for self-employed professionals. But if you’re not familiar with these rules, the basic concept is pretty simple: you will have to send quarterly tax payments on your freelance income if you expect to owe $1,000 or more in taxes during the year.
But the devil’s in the details because it’s up to you to figure out how much you’re going to earn and calculate how much tax you expect to owe. If you’re like most taxpayers, you’ve formed a habit of ignoring taxes until April. But as a freelancer, that’s a habit that you simply can’t afford to form.
Taxes for regular W-2 employees are deducted from each paycheck, so typically twice a month. As a freelancer, you owe it to yourself to keep on top of your finances (and taxes) at least as often, because it can really help ease the pain when it comes time to write that check to the IRS. In the spirit of easing those tax pains, here are 5 ways you can save yourself some headaches in April.
1) Use modern accounting software
There is nothing more daunting than a shoebox full of receipts, so throw away the shoebox and use something sane to track your expenses like Wave. It will keep you organized, up-to-date on the status of your business, and will help you better understand your financial outlook. There are so many reasons to upgrade to better accounting software, but the benefits from a tax perspective are huge. If you understand how your business is doing financially, you can predict how much you will owe the IRS and send your quarterly tax payments accordingly.
2) Open a new bank account/credit card for business purchases
The easiest way to track business expenses is to separate them from your personal purchases. If you don’t make many business purchases this may be overkill, but if you’re doing several transactions a month, it’s a no-brainer. Opening a new bank account/credit card with your existing bank is usually free and if you choose the right card, you can even earn rewards points on these purchases. These things really add up if you have a lot of cash coming and going — every penny counts!
3) Pay close attention to your big purchases
You probably know that something like printing advertising brochures is a deductible expense. But did you know you can also deduct your laptop? You can even deduct a portion of your living expenses if you work out of a home office. The key here is tracking these expenses, because saying “I paid around $1,500 for this laptop” doesn’t quite cut it. Keep the receipts, flag the purchase in your accounting software, and put this information in a place you won’t forget about come April.
4) Track all of your business mileage
Driving to your client’s office is a deductible business expense. But you can’t just guess how many miles you drove, you need to keep track of each trip in case you get audited. You can do this the tried-and-true way of using pen and paper, or you can use some pretty cool apps that will help you: Miletracker (iOS, $2.99) or MileBug (iOS, Android, $2.99) are great options. These apps let you enter mileage on the go and give you some awesome PDF/Excel files for you or your accountant to look at afterwards.
5) Estimate your taxes early
Once you’ve got a clearer picture of your finances, you need to anticipate how much you will owe the IRS. For freelancers who have to send quarterly payments, this is the most important piece of the puzzle. The IRS provides a paper form to calculate your payments (Form 1040-ES) if you’re old school. Or you can step into the 21st and use a service like GoodApril that will stay on top of it for you. GoodApril will help forecast your tax burden and will notify you of upcoming tax deadlines.
As with most things, the key to making April painless is record-keeping. Easier said than done, right? It’s really not as hard as hard as it sounds. With services like Wave, GoodApril, and cool new mobile apps, it really can be painless.
Freelancers, stop worrying and freelance away!