Being a freelancer is challenging. By the time you figure out how to market yourself, secure clients, accept payments, pay contractors, and deliver work, you’ve done a year’s worth of work for five people! Then there’s another thing you have to do: your taxes.
There’s a lot of fear that circulates around taxes. Between the filing and the actual paying of your taxes, you might lose a bit of sleep while you make sure you’ve kept track of all your deductions, gathered all your 1099’s or K-1’s, and hit that deadline.
Let’s get rid of that anxiety you’ve been holding on to around bookkeeping and taxes. After reading this article, you’ll be in solid shape for your tax prep and staying on top of your monthly financials.
These steps I’m about to share with you are the basics for sole-proprietors or single-member LLC owners and will give you the best practices to understand and navigate tax time whether you do them yourself or hire a professional.
You’ll find this particularly helpful if you’re already paperless and web-friendly, which is probably a safe bet considering you’re on the ConvertKit blog. Let’s dive in.
Banking tax tips for bloggers
You started a few side projects and now you're starting to accumulate real income and the expenses associated with these gigs. In the beginning, opening a separate “business” bank account seemed like a joke and a tedious task, but now it's time to do your taxes and you have no idea how much you made or spent. The best way to avoid this is to open a separate bank account from the beginning.
Open a separate bank account for your business
Assuming you didn't do that, the best way to get up to date is to open a separate business account today. This account will be where you deposit all your checks—or connect to your Stripe account—and will be the credit/debit card you attach to all your subscription software services and even pay for business lunches with.
Going further, if you open a separate savings account to deposit your estimated income tax (Step Three: Quarterly Taxes) you anticipate owing as you go along, you won't have to worry about keeping a certain balance in that main operating account.
Do you sell taxable goods or services? You'll need to collect and remit sales taxes. Having a separate savings account to deposit all the sales tax collected is a great way to avoid spending money that's not yours. The amount shown on your “sales tax payable” ledger in your bookkeeping will match what's in this account. Having this setup means you won’t worry about spending that money accidentally out of your operating checking account.
If you prefer to pay for things with credit (yay air miles!), then make sure you set aside one card for business only. Keeping these transactions separate will save you time at year end, and likely save you money if you pay someone else to file your taxes.
Action Item: Open a separate checking account for your business today.
Bookkeeping tax tips for bloggers
If you're taking your freelancing seriously and considering going full time (if you’re not already), you'll want to know where you're making and spending money. This enables you to get a view into where to focus your time and attention for the most profit. This doesn't mean you have to quit doing your favorite gigs, but it may mean you need to have a conversation with your clients about your rate. For example, perhaps project-based billing rather than hourly would help?
Generally, you have two options when it comes to bookkeeping– DIY or hire out.
As you expected, hiring will almost always cost you more per month than doing it yourself, but consider some additional costs other than your cash per month. How much is your time worth and how long will it take you to do your bookkeeping? Are you competent or willing to become competent at bookkeeping?
Every freelancer makes their own choices about where to engage a pro and this is no different. If you'd like to do your own bookkeeping, a Google doc can actually be great. If your needs are bigger, you may consider Freshbooks if you also need invoicing or Xero if you need more robust reporting.
Do you just need a basic income statement and balance sheet? Or do you need invoicing, bill pay, and financial planning? The range is vast and making sure you know what you need before making a purchasing decision is crucial because the cost of a simple system can be less than half of a full-service one.
Bench.co or a trusted referral are great options to get your books done for you. Remember, just because someone is doing your books, doesn't mean you don't need to provide input or spend time working with your bookkeeper!
Action Item: Set up a bookkeeping system.
Quarterly tax payments for bloggers
Our income tax system is a “pay-as-you-go” system. When you are an employee, these taxes are collected and remitted for you. When you’re self-employed, this is up to you. Be proactive and avoid having to go into payment plans with the IRS. It’s difficult to dig yourself out of a hole like that and continue making current estimated tax payments.
Avoid tax prep time surprises, especially if it's your first year or the first year making a significant amount of income by staying current with your quarterly state and federal income tax payments.
How much should you pay for quarterly tax payments?
A general estimate is to save about 30% of your net income (revenue less expenses) for income tax (remember that savings account you opened in lesson 1? This is where it comes in handy). This will vary widely depending on:
- Your industry
- Types of expenses you have
- Whether you're optimizing your tax situation for healthcare and self-employment retirement accounts
- How much you made
- If your state has an income tax
You can use your vouchers from your prior year return if you were self-employed last year. Remember, owner draws are not an expense as a sole proprietor.
Where to pay your quarterly tax payments
You can pay your federal “Estimated Tax” online or send in a check with a voucher from your prior year return. Your state probably has an online payment system as well. These usually cost an extra 2.5%. If you have vouchers from your prior year return, the instructions are listed there. Alternatively, you can simply google “How do I pay my income taxes for (your state)”.
You may be subject to additional quarterly or annual taxes on top of income tax. These could include a gross receipts tax, sales tax, or an LLC “pleasure of doing business” tax. If you want to find out more about your state, research “(Your state) Department of Revenue” or give us a call.
Action Item: Set up calendar appointments or reminders for your quarterly tax payments.
Business deductions for the self-employed
Generally speaking, the IRS allows business deductions that are ordinary and necessary. This is why it’s difficult to list an exhaustive list of deductions for all self-employed people. It’s important to note that deductions generally come down to a facts and circumstances judgement.
Some expenses may be ordinary and necessary for one business, but completely illegitimate for another. An ice cream maker will be able to deduct sugar and cream, but this is unlikely for a marketing consultant. This is why it’s good to get the advice of an experienced tax professional. Don’t defer to tax software to make this decision.
Approach deductions with caution– just because you can, doesn’t mean you should. The better your records, the better your chances of maintaining a deduction under audit. As a self-employed person, your situation is grayer than a separate corporation.
You are an individual and a business. It’s easy to slip into thinking that your regular personal expense are deductible. There are many personal deductions allowed, but we’re going to focus on your business expenses only here.
Also, it’s important to note that your net income according to your books won’t likely match that of your income tax return. There are some items you can choose to pay for out of your business, but the IRS will treat them differently. Generally, they allow fewer deductions, with few exceptions.
Deductions you may be able to take.
- Auto and mileage: (discussed next)
- Home office: based on standard or actual expenses prorated by the square footage of your regular exclusive business use area of your home. IRS Publication 587 has more detail.
- Business meals: when there’s a legitimate business purpose. Regardless, this deduction will be halved as the IRS knows you were going to eat regardless.
- Self-employed health insurance: available to self-employed people who are not eligible for another plan. It can be a great way to cover yourself and your family and get a tax deduction.
- Retirement contributions: contributions to your retirement under a traditional IRA or SEP account.
Deductions you cannot take.
There are many misconceptions about what’s ordinary and necessary as a deduction. The key is to remember that the deduction is supposed to be ordinary and necessary for your business. That means a new shirt, lunch, or coffee may be personally necessary, but not deductible for your business.
The most common illegitimate expenses we see are:
- Solo-meals, including coffee: must have a legitimate business purpose for meals and entertainment. Your daily coffee is not ordinary and necessary for your business. That said, if you supply an office for your employees (yes even you), it may be more acceptable to treat this as a business expense.
- Cell phone 100%: probably going to have a cell phone anyway. Track how much you use your phone personally versus for business.
- Gas: see the mileage section (next) to learn how to properly account for all your auto expenses.
- Clothing: if you can wear it anywhere other than work, it’s not deductible. Putting a logo on it does not mean it’s work clothing. It could be argued that shirts with your company branding are marketing, but a new suit, dress, or heels would not be an ordinary and necessary business expense even if you’re required to wear a tie for your job or want to impress a new client.
- Travel: if the purpose of your trip was primarily personal, only the business related days and expenses are tax deductible. Also, if you are a full-time traveler (remote-year), it’s possible that none of your travel expenses may be deductible as you don’t technically have a “tax-home” to travel from.
- Startup and organizational expenses: part of your expenses are allowable when you’re getting set up. Typically you are not allowed to expense everything you spent before beginning operations. These are limited to $5,000 each for startup and organization expenses and phased out when they exceed $55,000. Startup expenses are those you would ordinarily incur during operations (when you’re selling your service or product) and organizational expenses include LLC setup and legal fees.
You are entitled to legitimate business deductions. Make sure you know the difference, or hire a professional who can help.
Action Item: Save your business meal, entertainment, and travel receipts and document who you were with and what the business purpose was.
Mileage & auto expenses tax tips for bloggers
Now, let’s talk about mileage for auto deductions.
Do you drive to projects or sites for gigs? Maybe you use your vehicle for business “most of the time”. Are you entitled to a deduction? The short answer is yes.
Track your miles
To qualify for the standard mileage deduction or actual expenses, you need to track all your miles on each vehicle you use. That means your tax accountant, or software, will ask you how many total and business miles you traveled in your car.
Track your auto expenses
If you have a full listing of expenses related to operating your car, you can then take that business/total ratio and multiply by the expenses. Then, you take the most beneficial deduction. There are some additional specific rules about which method you can use.
Software and rules
Remember, commuting is not considered business mileage. Most people don't track their miles. Don't be most people. If you're audited, this will almost surely come back to bite you. Depreciation and purchasing a vehicle is beyond the scope of this guide. The main takeaway is to track your miles. Consider using MileIQ or Expensify's mileage tracking feature, or perhaps you have a moleskin lying around waiting to be helpful?
Action Item: Track all your miles, business and personal.
Stay organized with your tax prep
Here is the sixth and final point.
Whether you have neat and tidy Dropbox or file folders with all your business documents, receipts, and statements, here are some tips to get you started or help save some time.
Mostly importantly– You should save your tax return for seven years, receipts and bank statements for three years, and your business setup documents forever (LLC formation, business licenses).
Dropbox and Google Drive are great and have apps for your phone which make sharing and saving files with your accountant, banker, or contractor easy. Dropbox also has a secure and seamless way to request files from people and be notified when they are uploaded.
Find the right software
For receipts, you can use your bookkeeping system (Xero, Freshbooks, Bench, and Expensify all have built in receipt saving features). You can also use Receipt Bank if you need to manage invoices and payables as well.
Automate your statement collection
Save your bank statements. This will keep you from having to pay $5 or $10 once your bank decides to no longer keep your statements on file. Each bank is different, but many purge their files in three, six, or 12 months. Use Hubdoc or FileThis to connect your bank and credit card statements to save automatically.
Better yet, connect these accounts to your Dropbox or Google Drive, and you'll never have to worry about finding your old statements again. Just make sure you reconnect the account if it breaks (software isn't perfect…).
Action Item: Set up a filing system on Dropbox or Google Drive. Use Hubdoc or FileThis to automate collection.
Bonus: Download these folders to help you stay organized all year long!
Do you feel more prepared with these tax prep tips for bloggers?
Here’s a quick look at everything we covered today:
- Open a business checking account
- Do your books (or get them done)
- Pay your quarterly taxes
- Track your miles
- Get the right deductions
- Save your documents
If you can keep up with those five steps, you'll be in good shape for tax time, loan applications, or audits. A system’s strength really lies in its consistent application. If you have another idea, great! Stick with it. The key is to find a way that works for you to stay on top of this stuff.