Doing Your Tax and Accounting Homework
Of the many hats that freelancers must wear, one is not really a hat at all: it’s actually a green eyeshade. :) You’re going to be a self-employed business owner, and that means that you need to deal with both tax and accounting issues that conventional employees do not. This isn’t necessarily a very complex process, but some attention up front can save you down the road in terms of time, hassle and money as well.
This topic will not be as in-depth as the others in this section for a very simple reason: accounting and taxes are far from my personal area of expertise. Not only are these fields where expertise requires years of training and experience, but I personally don’t even do my own taxes: my wife does. Thus, all I can really do here is give you some general bits of advice.
The most important recommendation I can make is to be willing to spend some money consulting with a tax advisor or accountant before you begin freelancing. While this won’t be cheap, it could be one of the best investments you ever make. The tax code, at least here in the US of A, is so complex that nobody outside the tax industry has any prayer of really understanding it. A smart tax lawyer or accountant can give you invaluable advice on how to structure your business, what items you can count as expenses, and much more.
The best way to find someone good in your area is to get a referral. Ask a family member, friend or colleague whom they use, especially if you know someone who runs a small business.
When you consult with the tax professional, ask both specific and open-ended questions. You want your particular concerns addressed, but you also would like to take advantage of the individual’s experience to suggest ways you can make your business more efficient. You may be surprised at the techniques and tips that a good accountant can up with that you’d never have thought of in a million years—I know I was! Give the professional as much information about your situation and your needs as you can, so he or she can help you better.
Be sure to also ask or look into tax payment filing requirements. Regular employees have their income taxes withheld from every paycheck, but self-employed individuals generally have to send in regular tax payments, or they could face penalties and interest.
At its most basic, accounting is simply the process of keeping track of money flows: what comes in and what goes out. Accordingly, the most important general tip I can give you with respect to accounting is this: keep track of everything. Every time you make money as a freelancer, record what you earned. Every time you spend money on your business, record what you spent.
This doesn’t have to be complicated, and you don’t need special accounting software for it. I use a simple Excel spreadsheet, with each row recording the date, an amount earned (positive number) or spent (negative number) and a description of what the item represents. It can also be useful to have another column in the spreadsheet that categorizes the item, so at year end when you do your taxes, you can easily tally up various kinds of expenses.
When you are recording earnings from freelance projects, be sure you also record any relevant project-specific expenses associated with them. Also keep track of all fees that you pay to freelancing marketplaces sites, including up front, monthly and transaction fees.
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Last Site Update: February 1, 2012
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