It’s really not scary. A pain in the spreadsheet, yes, but it’s totally possible to do your taxes yourself instead of hiring an accountant, even if it’s your first time. Look at it this way, if you can handle starting your own business, you can handle this.
But first! Before you decide to go it alone, you must answer an important question. Have you kept accurate records of your income and expenses this year? If not, then sorry – you really need professional help, but read on to learn how to do better next year.
Keep records. You can purchase software specifically meant for this, or keep track of your income and receipts with a spreadsheet of your own to save money. If you stay on top of it month by month, tax season won’t inspire so much panic. I use an Excel spreadsheet that I’ve divided into columns – one column per type of expense. I record all my receipts there each month. The spreadsheet does the math for me.
File quarterly. Whatever structure you chose when you started your business, LLC to corporation, or even if you pull freelance income together as an individual without an official business entity (which I wholeheartedly DO NOT recommend), if you don’t have taxes automatically removed from your income, you may be staring down a daunting sum when all the columns add up once a year. Spreading it out to four times a year instead of one will reduce the sticker shock, especially if you only make enough profit to get by in the first place.
How do you do this? You have to estimate your income for the quarter and submit it by a certain date throughout the year. The IRS has a handy worksheet and F.A.Q. page to help you.
Save up. Every time you get paid, put some away. The range of how much you’ll be taxed on your income varies, so there’s no magic number, but if you’ve squirreled away 10-30% of each paycheck, depending on how much you can spare from one month to the next, you’ll have a respectable cushion from which to pay Uncle Sam.
There are lots of options depending on how much self-control you have. If you can’t trust yourself to set aside enough from every payment, you can set up a separate savings account and schedule smaller weekly transfers. Make it hard to access this money so you’re not tempted to spend it when you’re a little short on other expenses.
Know what you can write off. Business expenses are all about reducing the amount of your taxable income. The supplies you use for your business are obvious. Travel expenses have specific rules and are worth checking out if you travel for business. Most importantly, did you know that if you work from home, you can designate the square footage of your work space and use it to write off a percentage of your home’s expenses – even if you rent? As long as this space is used “regularly and exclusively” for your business and is your only place of business, you can write off a percentage of your insurance, utilities, and more. This is helpful, but don’t get greedy. If you’re ever audited, you have to be able to show that this is exclusively your place of business and doesn’t double as your guest room or living room sofa.
Other possible write-offs may include:
- Interest on credit purchases and business loans
- Customers who don’t pay (this only works for goods, not services)
- Legal and professional fees
- Paypal and other merchant fees
- Expenses of starting the business
- Donations
- Advertising and website maintenance
If you want to feel more confident before you dive in, the IRS offers a virtual workshop in small business taxes. It’s worth the two and a half minutes to watch the video.
To assume the first person for a moment, I am a freelance writer and editor, and I work under my own LLC. Do I have math skills? Zilch. Accounting experience? Nada. But I do keep myself organized and do my own taxes. If nothing else, it’s cheaper than hiring someone or buying software. If I can do it without bursting into flames, so can you.