Let’s be honest: Nobody wants to prepare for tax season. Whether you’re a full-time employee, a freelancer or run your own business, filing taxes is one of those necessary (but often painful) experiences you’d rather not have to deal with.
When I first transitioned from doing some work on the side to freelancing full-time, I received a rude wake-up call when it was time to figure out my taxes. I spent hours and days trying to dig up old records of income and expenses, and researching what I needed to declare, claim and file as a sole proprietor. Here are my biggest pieces of advice for new freelancers on how best to prepare for tax season:
Keep Detailed Records (and Update Them)
It’s much easier to maintain records of your income and expenses on a regular basis than it is to try and dig up the information a year later. I maintain an Excel document that tracks all of my activity as a sole proprietor, and I update it as frequently as possible. At the very least, I catch up with my records every month. That means recording every pay check that comes in: The amount and currency, when it comes in, what account it goes to, who the client is, what the work was and how much sales tax I charged.
The same goes for expenses. While most transactions these days have digital records, I also keep physical receipts of my expenses when I have them. As a sole proprietor working out of my home office, I typically make the following claims: A percentage of my rent, phone and Internet bills, capital expenditure for equipment such as my laptop and phone, desk and office supplies and client-related costs such as coffee, food and transportation to meetings.
Keep Expense Claims Under Control
While it can be tempting to write-off as much as possible as a freelancer, don’t go overboard. Stick to what’s reasonable. My home office also serves as a portion of my living space, so I only claim a percentage of my rent as a business expense. The same is true of my phone and Internet usage. While a very large portion of these activities are business-related, some are personal. Be honest about this. You don’t need to give the government a reason to audit your tax records.
Note Processes You Might Forget
To this day, one of my biggest struggles is simply forgetting exactly what I need to do and how I need to do it come tax time. It can feel like you’re figuring everything out again for the first time.
Last year I opened a business bank account to remit income and sales tax online. I would transfer the money needed from my other bank when it came time to file and pay, and completed the whole process online. It went very smoothly. Only this year, I had forgotten the exact procedure which led to delays and added stress that I could have avoided.
Now I keep a little document containing notes about how I’ve chosen to set up and file my taxes. This serves as a reminder of the procedure for if I forget it again next year. I attached it to a calendar reminder in advance of next year’s tax filing deadline so that I receive an automatic notification, and don’t have to hunt for that document too.
Hire an Accountant
I was reluctant to hire an accountant to take care of my tax filing at first. As a freelancer, I’m inclined to handle most business activities on my own. It’s this kind of independence that drew me towards freelancing in the first place.
That was until I calculated the value of hiring someone who actually knows what they’re doing to handle the process. A quick estimate of the value of my time on an hourly basis, over how long it took to get my taxes in order the first year was enough to convince me that the cost of hiring an accountant was well worth it.
My accountant is invaluable at tax time, but he also serves as an asset throughout the year. If I have a question about anything related to my finances as a freelancer, he’s my go-to source for answers. As I’m growing and evolving my business, I encounter new financial situations all the time. Having an accountant there to clarify how I should proceed saves an enormous amount of time later on, and also gives me peace of mind.
Filing taxes as a freelancer is inevitably more complicated than as a full-time employee. Don’t do yourself a disservice by waiting until the last minute to figure it all out. Having the right systems in place now will help you prepare for tax season with the least amount of stress and fewer obstacles to overcome.