Personal finance expert Timothy Gagnon shares important steps that freelancers can take to ensure they are preparing their taxes correctly and to their best advantage:
- Put 40 percent of every payment aside in a separate bank account (your withholding for federal taxes, state taxes, self-employment taxes (both sides)). Any additional funds that are not sent to the government become your “bonus” for the year.
- File your quarterly estimates in April, June, September, and January of the following year; they are not perfectly every three months or quarterly, so watch due dates.
- Estimates are based on net earning through the last date of the month before the quarterly date.
- Set up a system to collect, categorize, and track all your expenses of producing the revenue; they are deductible against the revenue and reduce taxes, but you need receipts that detail who was there and what the expense is for.
- Track your home expenses, since you may allocate a part of those expenses to the business and reduce taxes.
- Start tracking, categorizing, and accounting in January and not two days before you do your taxes.
- Hire a tax preparer for compliance, who can help in calculating estimates, do a simple accounting/bookkeeping report, and most importantly, advise about reducing your taxes and staying current with a changing tax code.
- Set up a tracking system on your billing and watch collections.
- Set up a separate bank account and credit card for the freelance work so only business expenses go through them and thereby reduce the potential argument with the IRS on audit that a trip to Starbucks was business and not pleasure.