Being your own boss seems nice at first, but if you don’t watch out, come tax time, there can be some nasty surprises in store for you. Sticking your head in the sand won’t make it go away and, year after year, it will just accumulate until you will just have to deal with it.
It doesn’t have to be this way. And with a bit of planning and knowledge, you can be one of the success stories of a self-employed person, not one of the statistics.
1. File your taxes.
Every year. Hire a tax professional. They will be your trusted advisor during this stressful time for you. Using a DIY online tax program is not a good option for a solopreneur and it will confuse and overwhelm you.
2. Your bank balance is not your profit.
Many business owners make the mistake to think that the money that is leftover in the bank is their profit. That is cash flow. The IRS expects you to detail your income and expenses from self-employment on your tax return. Filing it without this detail leaves you with high potential for an audit!
3. Don’t wait until the last minute.
Pulling out a year’s worth of bank statements in the last days before the tax deadline and trying to figure it all out for your tax return is a very frustrating exercise and not very accurate. Not only will you not capture all the tax deductions you might have during the year, you also lose out on having some valuable information available to you at the time it matters the most, the present.
4. Bank statements are not “proof.”
Contrary to popular opinion, proof of business purpose on a purchase, or the reason of each deposit is not detailed on any bank statement anywhere, in any universe. The IRS also knows this and if you are audited, will probably throw out all your expenses and include all your deposits as income if your proof were indeed those bank statements. You will say “but, why?”. The answer is most of the places we spend money at have both business and personal goods.
Bonus Tip! Keep all your receipts. In fact, a better option is to use an app to keep receipts that you can access in two to three years (an audit sometimes will take longer so you need access to your information).
5. Balance your checkbook.
If you don’t know what this means, you will need professional help to get started. What used to be a tedious task can now be done in a snap with the help of technology. Your tax advisor can help set you in the right direction and is a better resource than TikTok.
6. Save money for taxes.
It feels good to get a payment directly from a customer and not have all the taxes taken out before you get it. After all, you can write everything off, right? If you are not keeping track of your income and expenses during the year, it’s a great idea to put at least 25% of each customer payment you get in a savings account to save it for taxes. Even better, send up estimated tax payments to the IRS and your resident state during the tax year. That’s actually when they expect to receive it from you. This can save you thousands of dollars on penalties and interest alone by just taking that initiative.
7. A plastic grocery bag is not a storage device for receipts and other business documents.
It has become so easy with the advent of apps to keep your receipts and other docs neat, tidy, and organized and contained in the space of a cloud. So much more environmentally friendly.
8. Don’t take your tax pro for granted.
Your tax professional has to plan and schedule each tax season so that everyone’s tax return gets filed on time, including yours. Respect their deadlines and give them the information they need to do your tax return when they ask and give them all of it at the same time, not in bits. They are on your side. Don’t mess with the cook in the kitchen; you will have to eat what they made.
9. Be OK with paying taxes.
Paying taxes is not all bad. If you are doing well with your endeavors, you will have a profit and then, yes, you will pay taxes. Avoiding to pay taxes or paying less than what you consider to be too much taxes will bite you back later. Working with a tax professional will ensure that you are paying the taxes you should.
10. Your friends, search engines & social media are not good sources of information.
The tax code here in the United States is one of the most complex in the world. Don’t forget the state or states you are doing business in as well; they have tax codes, too.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting and business articles for freelancers on his website, http://www.cpaforfreelancers.com, which also features a free newsletter, blog and a comprehensive freelance tax guide.