Tax season has just come to an end, but that doesn't mean you shouldn't be preparing for next year. In fact, if you organize yourself throughout the year, you will have less work to do next year, and you will be more likely to plan for credits and deductions that can help you reduce your tax liability. (Of course, before you make any tax moves, you should consult a tax professional who can help you determine what might be best for your situation.) If you are a freelancer, it is especially important that you consider your tax situation, and remain organized throughout the year. Here are some tax tips for freelancers to consider:
Separate Business from Personal
The first thing you have to do as a freelancer, whether you are a sole proprietor, or whether you set up some sort of a business (LLC or S-Corp.), is recognize the difference between business and personal. If you want to deduct something as a business expense on your taxes, you had better make sure that it is, in fact, a business expense. If you are using it for something else part of the time, it is not a business expense. One of the few exceptions to this real is your Internet service, in which case you can estimate how much of the Internet time in your home is used for business activities and use that percentage to figure your business expense related to online use.
It is a good idea to open a separate account for business purposes. Some banks won't let you open a business account unless you are a registered as a business organization. But, even if you are a sole proprietor, you can open a second personal account and use that for your business activities. Even if you use your freelancing as your income, it is a good idea to have your freelance earnings deposited first into the account you designate for business, and then move the money (by writing a check or some other transfer) into your personal account. Make business purchases for supplies, travel and other business expenses, using your business account, and do not make personal purchases using your business account.
Keeping all of this separate will show that you are conscientious, and if an IRS audit does happen, it will be easier to document your business expenses.
Use Financial Software
One of the best ways to get organized is to use financial software. Most financial software programs allow you to keep track of multiple accounts. You can use the financial software to track how you move money from your business account into your personal account, and you can use category tags to help you keep track of specific expenses, making your Schedule C form easier to fill out. Here are the most common expense categories that freelancers come across, as listed on Schedule C (which you use if you are a sole proprietorship — if you are an S-Corp. or LLC, you will use another form):
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- Insurance (not health)
- Legal and professional services
- Repairs and maintenance
- Other Expenses
There are other categories on Schedule C; look over them and set up the expense categories on your financial software to correspond with what's on the tax forms. Note that health insurance premiums can be deducted above the line on the front of your Form 1040, if you are paying for individual insurance yourself. (If you are reporting a net profit of zero or a loss, you will have to itemize your health insurance premiums instead of using line 31.)
Keep Documentation in One Place
Have a specific file for business expenses. Keep receipts and other documentation in this file, keeping it all together, throughout the year. If you write reviews, and bought a movie ticket, make sure to keep the receipt, and then print out a copy of the review to show that you did use the experience as part of your freelance work. The same rules apply for conference attendance and related expenses. Make sure that you have something to back up the receipt.
Keeping your business expense documentation in one file makes it easy to retrieve it at tax time, and it will help you keep an eye out for proper deductions. When your tax return is filed, keep your documentation with your copy of your tax return. I like to put it all in one large manila envelope labeled with the tax year.
This is a guest post Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.
*Please consult tax advisor for advice on specific situations.
photo credit: rajue