I did it! I filed my taxes for my first year of full-time freelancing, and it really wasn’t so bad. When you freelance, you are a small business owner, and all the financial crap that comes with that is one of the most off-putting things about this career, at least for me. 2015’s taxes weren’t really scary. I didn’t make all that much, I didn’t have a business name or an official business license, and I didn’t have to fill out any complicated forms. My income was basically just put down as additional income in my husband’s taxes, and we just clicked onto the next page of Tax Act’s system. No biggie. This year, I was super worried. For the first four months of 2016, I was still part-time and recording my earnings in a notebook. I would then paperclip my expense receipts to said notebook. When tax time started rolling around, I started looking back at my old abysmal accounting methods and got pretty nervous that I was going to screw something up. But, I think I made it out unscathed. Of course, you can be audited up to three years later, so I guess we’ll see.
I ended up paying a lot less than I expected, too. From June through December, I started setting aside 20% of my income for taxes, saving a total of around $1,900. My husband and I filed jointly, and we only ended up owing about $875, most of which came from my small business owner tax, not my husband’s job. We hired someone from H&R Block to help us with taxes this year, and the fee came to about $300, still leaving money in the bank from my monthly savings. That extra money is going to stay in savings, and I’m super happy it’s still there.
I want to lay out all of the things that ended up helping me out this tax season so that, if you’re just starting out, you know how to best prepare yourself and keep track of your finances in a way that will make things easy breezy come next April. Please realize I am not a tax professional; this post is just meant to be a helpful little look into taxes from the perspective of a someone like you, to give you some idea of what it’s like.
Get Accounting Software
If you read my income reports, you know I use a program called FreshBooks to send invoices and keep track of my finances. Every invoice I send through the program is automatically recorded in the system, along with the service fees for credit card payments. I can manually add other expenses with photocopies of the receipts uploaded to each entry. Then, I can print out reports that show profit and loss, invoices paid or unpaid, compare my earnings year to year, etc.
(To learn more about what Freshbooks can do, read my review: Professional Invoicing and Financial Tracking for Freelancers: FreshBooks Review)
All I had to hand over to my tax professional was a single-page profit and loss report from FreshBooks. No hassle. Or, at least, there wouldn’t have been had I used Freshbooks for the whole year. Instead, I had to haul my little journal along with me and tally up all the scribbled entries. I ended up not inserting my expenses from the “journal period” because I just didn’t trust the accuracy (pretty sure some of the receipts had fallen out somewhere), and there weren’t many of them anyway; I’m a better-safe-than-sorry kind of person. No journal accounting for me in 2017.
Know What’s Deductible
If you have a good understanding of what counts as a tax deductible expense, you help ensure that you don’t miss out on a tax break and that you don’t waste time saving receipts you don’t need. Some things I deducted this year were courses I had taken to further my business, like my editor certification course and my affiliate marketing course; some office equipment, like my treadmill desk setup; and processing fees that Freshbooks and PayPal take when clients pay via credit card. You can also deduct things like office supplies (pens, paper, printer ink, paper clips, postage, etc.), expenses accrued during client meetings (gas costs, meals, hotel stays, etc.), and even things like the cost of a new computer and your internet bill. For more detailed lists about deductible expenses, you can read Kelly James-Enger’s Writer for Hire: 101 Secrets to Freelance Success and Zachary Petit’s The Essential Guide to Freelance Writing: How to Write, Work, and Thrive on Your Own Terms. Both cover living and working as a freelancer, and each have a chapter that covers dealing with taxes.
(You can read my reviews of James-Enger’s and Petit’s books here: 12 Things You May Not Know About Traditional Freelance Writing: Part One and Part Two)
However, the bigger the expense, the more complicated the deduction process gets. For instance, your internet bill. Chances are you use the internet for more than your business, right? So it isn’t fully deductible, just a percentage. If you want to deduct the cost of your new laptop, you can only use that laptop for work. It needs to stay in your office or wherever you do your work, and it shouldn’t have anything but work-related links in its search history.
Get a Home Office If You Can
My home office was the single largest reason we didn’t have to use all my savings this tax season. What I didn’t know was that there are two ways to insert your home office into your taxes. If you have a lot of patience and you like math, you can figure out how much electricity your home office is using, add the internet usage in there, add up the square feet, insert expenses associated with the office, and then fill out a nice form for all of it. This is definitely an intensive method, but it can often get you the largest tax break. However, our tax professional advised against it this year, not only because we didn’t have any of that info prepared, but because I had only had the office for September through December of 2016. She said that with such a short amount of time, it probably wouldn’t get us any huge break, it would require us to spend a lot of time figuring out the numbers, and the form that was required would be added to her bill (H&R block charges by the form). So, instead, we took the lump sum option. Now, that’s not actually what it’s called, but I’m not a tax professional and that’s just how I remember it. With this option, you just get a set amount of money per square foot of the office. Based on the size of my office, we got $600 taken off what we owed, and the cost of that little form hardly touched our H&R Block bill; I’m talking like $10–15. Totally worth it.
This is the main form I had to fill out as a small business owner. If you’re going it alone, just know this is the big boy you’re looking for when you’re using Turbo Tax or Tax Act or any of those great, cheap online tax programs. Thought I’d put that out there because I had no idea which form I needed going in.
Hire a Professional
This is just my personal opinion, but I really think for the first year of working freelance full-time you need to hire someone to help you. When my husband set up the H&R Block meeting, my stress level went way, way down. I didn’t have to worry about figuring out all the right forms or stress about filling something out wrong. I just gathered up all the info I had, brought it in a folder, and handed it over to a woman who had been doing this for two decades. She explained everything as she went along, and we have all the forms printed and tucked in a folder to look back on next year. After walking through it with her that way, and having all of those records to compare, my husband and I feel more confident that we can do it ourselves next year and save even more money.
This is my next item of stress. If you expect to pay more than $1,000 in taxes as a small business owner, you are supposed to submit quarterly tax estimates after your first year of operation, or you can be subject to extra fees. If I hadn’t had the home office, I would have paid over $1,000 in taxes, and I’m already on my way to making more than last year, so I have to figure out how to do this. You are supposed to use the previous year’s taxes to help you do this, which I just got a week or so ago. Of course, the first quarterly deadline was April 15, and I missed it because I had (and still have) no clue what to do about it. I’m not sure how strict this all is for the first year you’re supposed to do quarterlies, because that first one is due at the same time regular taxes are due, and you may not have all the proper info in time as a result. The next one is due in June, so I’ll make sure to have it all figured out by then, and then I’ll share what that was like here on my blog. Just keep that in mind so you don’t have the same issue I’m having right now. If I had remembered quarterlies were a thing, I would have asked our tax lady about them, but I’m not that lucky. If you have ever filed quarterlies, please reach out in the comments.
Taxes are scary, especially the first year. You’re just starting to figure out your career and the ins and outs of running your business, and then you have to figure out how to bottle all of that down into a few forms and how to do it accurately. It’s a huge pain in the ass. I found our tax professional’s fee to be totally worth it just for my peace of mind alone. Don’t be afraid to ask or pay for help, take a deep breath, try not to shut your eyes, and just get it out of the way. Once you do, you can go back to working in a field you love.
9 thoughts on “Filing Taxes as a Full-Time Freelancer”
Taxes are worrying aren’t they. Things seem to be changing constantly over here and it’s hard to stay on top of it all. I must admit I have quite a vague way of recording things, although sadly not much income to record just yet! I tell myself I’ll get organised when I have some income to include. CJ xx
You’ll definitely get there, CJ, and it also took seeing some larger bank deposits to get me serious about my accounting, haha. I think those larger amounts just make it seem more real, and then you go, “Oh geez, I need to quit playing around.”
So helpful! Thank you! 🙂
You are very welcome! Thanks for reading.