Getting the year’s paperwork together for the “Tax Man” causes anxiety for everyone — for the creative freelancer it can seem brutal. In many other aspects of our job we use the creative side of our brains, but at tax prep time we have to make a sudden shift from right to left brain (imagine the screech of a speeding train’s brakes before it goes into reverse!) The organization and mathematical aptitude required seems to go against the writer’s natural nature.
[according to The Thinking Business http://www.thethinkingbusiness.com/ and other sources: The right brain is the creative brain and is responsible for rhythm, spatial awareness, color, imagination, daydreaming, holistic awareness and dimension ~and~ The left brain is the logical brain responsible for words, logic, numbers, analysis, lists, linearity and sequence.]
So down to the nitty-gritty boring stuff…
Hopefully you’ve been keeping your records all year long so it won’t take much to pull it all together, then again there are those of us who live by procrastination, avoidance and denial. The first item on your paperwork should be your income; the income could be listed by client, quarter, or a running list from all year but most importantly, include ALL of your income even if you don’t receive a 1099 tax form. Next you want to list your expenses that went into being a self-employed freelancer; it is super important to have a record of ALL deductions, deductions are those items you can literally DEDUCT from your income total for the purpose of paying taxes.
So what kind of expenses can be deducted? List promotional items like business cards, advertisements, rent for your business; business insurance (including a car your use primarily for business); new purchases and repairs for business equipment such as computers, printers, cameras; office supplies and furniture; and the cost of business related travel expenses and dining. Make sure you have actual receipts for each expense. If you are using a professional tax preparer he/she will be able to guide you using the latest IRS rules; when deciding on an accountant to use, ASK how familiar he/she is with SELF-EMPLOYMENT taxes.
Most tax advisors will recommend that you pay quarterly taxes; this is based on an estimate of your income as well as previous years. Workers who are paid on W-2s have deductions taken from each paycheck, however freelancers collect their earnings without any taxes being deducted. The quarterly tax schedule is designed to help avoid that huge crush to pay all the taxes you owe all at once. Most freelancers MUST pay quarterly taxes (approximately 15 to 16 percent of total income) or pay penalties.
Finally, prepare a decent and efficient filing system; as a freelancer you will need to keep your financial records for at least six years, receipts not just bank statements, in case you have to face the DREADED audit.
*Updates to this article originally written in 2010:
Writing exercise: You’ve been called in for an audit; the problem is you can’t seem to locate all of your records — we are assuming you didn’t cheat on your taxes. Write up the “excuse” you plan to use to convince the auditor so you won’t get fined or penalized
Writing Prompt: Pick ten items that you really can’t claim as deductions BUT would like to — explain why they should be authorized deductions. (for example, is your pet cat REALLY a guard cat for the business?)
Challenge Assignment: Using a standard ledger or Excel document, list your income and expenses for the past year. (you can find samples of author record keeping online)
