Disclaimer: I am not an accountant. The closest I can come to be considering one is from taking one graduate college course on accounting and using QuickBooks. This advice comes from my own experience.
Some people start a freelance business with little thought to the business part. That’s a small part of why I thought I’d never go into business myself. I didn’t know if I could figure out the admin part of the career beyond invoicing and getting paid. Then there are taxes (shudder).
Some of the companies I’ve freelanced for took care of the taxes. Most didn’t. So it was my responsibility as a U.S. citizen with her own business to take care of my contribution to a teeny part of the government’s budget. If nothing else, follow the golden rule and you’ll be … well … golden. For the most part.
Golden rule: Have extra money in your business account so you can pay your taxes.
I pay quarterly taxes. In IRS-speak: 1040ES (1040 estimated income form). Every quarter, I wince my way to EFTPS.gov and take care of the payment. Better to do it quarterly than to write a big check at the end of the year. Here is how I manage my taxes:
- Obtain an Employer ID number (EIN): See this EIN questionnaire to see if you need one.
- Save income for taxes: I make sure I always have cash on hand to pay those taxes.
- Figure out tax rate: IRS.gov states: “The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).”
- Pay quarterly taxes by April 15 (1st quarter), June 15 (2nd quarter), September 15 (3rd quarter) and January 15 (4th quarter). I pay mine on EFTPS.gov. I look at my reports in QuickBooks to see how much I made for X quarter. I subtract expenses from that. And then apply the tax rate to the total and pay that amount.
- Record all expenses and keep the receipts: Do you subscribe to business apps like for accounting or managing your website? Save those e-receipts. They contribute to your freelance business. Your home office, supplies, computer, phone and all that also count as expenses. Accounting treats some items differently, so check with your finance pro.
- Track payments to subcontractors: This typically doesn’t apply to me — I prefer to keep it a one-person business — but some of you may subcontract work to others. If you pay them over $600 in a year, give them Form 1099-Misc.
- Check state income tax requirements: Thank you, Texas, for making this easy. We don’t have state income taxes in Texas, but I had to pay income taxes to New York. So not only do you need to know your resident state, but also the income tax requirements of states where you have clients. Your finance pro can help with this.
Many user-friendly applications have come out that are easier to figure out than QuickBooks. The key is to find one that lets you create invoices, record payment and enter expenses. The rest are just extras and it’s up to you whether you want them or not. I also use reconcile and reporting features.
Track everything. What you pay. What you buy. Your invoices. Your received payments. Better to record everything and let the accountant determine what qualifies than to miss a deduction or other opportunity.
What other tax management tips do you have?