My So-Called Freelance Life - Michelle Goodman [70]
A lot of rookie and veteran freelancers ask me why they need to pay their quarterly taxes. “Why can’t I just invest that money and pay the government one lump sum come April 15?” they want to know. But paying Uncle Sam as you go is a fact of freelance life, just like staff meetings were part of your day job in your former 9-to-5 life. If you don’t pay quarterly, the IRS is all too happy to charge you interest on April 15, and their rates are not cheap. Keep in mind that you’re just paying an estimate of the taxes you owe each quarter, so if you’re a few hundred bucks shy of the total owed on April 15, the interest will be tiny.
Depending on your local laws and how much income you make, you may also owe city and state taxes, sometimes called a business license tax, at the end of the calendar year (these aren’t paid quarterly). If you register for a city and/or state business license (covered in Chapter 4), the city and state government agencies you register with can fill you in on the details, as can your accountant. City and state tax forms can be much easier to navigate than their IRS counterparts. I’ve gotten away with having my accountant walk me through them the first year, then filling them out myself after that.
Anal Like Me: Why You Need to Track Your Business Expenses and How to Painlessly Do So
Obviously, writing off business expenses can help lower your tax bill, but before we get into what you can deduct, let’s talk about how to track your expenses.
Basically, you need a system. You need to save every receipt for every business-related expense you plan to deduct on your tax return. (If you have the misfortune of getting audited, the IRS will want to see those receipts.) Bank and credit card statements won’t cut it; you need hard copies of receipts. If you buy something on the web, print out the receipt. If you take a client to dinner, note on the receipt who you met and what you discussed so you’re not left wondering what the receipt is for later. If you drive a lot for your work (real estate agent, traveling masseuse, and so on), keep a notebook in your car for tracking your business mileage.
Get yourself a fat accordion folder and file your receipts by category—office expenses, dinners with clients, trade magazine subscriptions, and so on. Come tax time, you’ll need to give those expense category totals to your accountant. (More on expense categories in the next section.) While many tax professionals recommend entering all your receipts into an accounting program like Tax MiniMiser (www.taxminimiser.com), Quicken, or QuickBooks, some freelancers—ahem!—still rely on the do-it-yourself Excel spreadsheet method. If you do want to try an automated program, though, QuickBooks Simple Start is free (http://quickbooks.intuit.com).
Entering your receipts as you go—say, weekly or monthly—can make this chore much easier. Don’t throw everything in one shoebox and wait until April 1 to sort it all out like I did for many years. You’ll curse yourself for doing so. Not only can those little white and yellow slips fade and get lost, they have the uncanny ability to make one lose her mind when stored in vast quantities.
How long do you need to keep this mountain of paperwork for? Experts say to hold on to your tax returns, expense reports, and expense receipts for seven years, then shred like the dickens.
Can I Write It Off?
A good accountant or CPA can help lower your taxes by ensuring you claim all the legitimate deductions you’re allowed. She’ll also stop you from making boneheaded expense claims that could get you into trouble with Big Brother (for example, multiplying the 250 hours