Many freelancers get overwhelmed at the idea of sifting through their receipts, invoices, and 1099 forms when it comes time to do their taxes. But tackling it head-on (and maybe hiring a CPA, or Certified Public Accountant) could save you buckets of money.
We asked experts to walk us through the tax prep process, step by step.
Step 1: Decide how to structure your business
Freelancers have three choices for how to structure their businesses: sole proprietorship, limited liability corporation (LLC), and S-corporation. Structuring your business is not a one-size-fits-all solution, and we can’t tell you which is best since so much depends on your location, chosen field, and business model.
Individual/Sole proprietorship
Pros: No filing incorporation paperwork, which usually comes with a fee and a bit of hassle.
Cons: No protection of assets in case of a lawsuit, no way to save for retirement with an SEP account, and self-employment taxes.
Limited Liability Corporation (LLC)
Pros: This form of incorporation offers some legal protection, allowing you to distinguish between your assets and liabilities and your business’s assets and liabilities. LLCs also have some tax flexibility and have the option to file as C-Corps or S-Corps.
Cons: You have to file with your state and pay a fee, although the paperwork for LLCs is relatively straightforward and in most states, it’s fairly inexpensive.
Pros: You can also operate as an LLC, with the same legal advantages, and set up your business so you owe less in self-employment taxes.
Cons: In most states, filing as an S-corporation is more expensive than for an LLC. You may also be subject to taxes that only apply to corporations.
Step 2: Find an accountant who works with freelancers
Enrolled Agent Rus Garofalo of Brass Taxes emphasizes the importance of working with someone who understands your industry, and the feast vs. famine reality of many freelancers: “The lives of creative people are changing all the time. You could have a year where you make $150,000, and then the next year you might make $10,000.”
You might even meet an accountant who’s in the same boat as you. “I’m also a freelancer, so I’m on the same journey,” says Jonathan Medows, CPA of his freelance clients. “I’m empathetic to their stresses.” We suggest doing your taxes with someone who makes you feel like a go-getter, a visionary, and a professional whose creative approach to business deserves to be taken seriously. (Hint: That person can be you.)
And If you're worried about the cost of pro tax prep, remember that accountant fees are one of many deductible business expenses.
Step 3: Calculate your income
You kept a running tally of how much money you made last year... right? Companies should have already sent you a 1099 form that reports how much you were paid as a contractor. But some clients inevitably forget to send you one. Don't worry. Report the income, anyway.
Jackie Folk, an Enrolled Agent working with freelancers in Los Angeles, recommends using accounting software to track your income as well as expenses. And if you use Wingspan? We’ve got you covered: our bookkeeping feature connects with your bank account to keep a real-time profit and loss statement.
Step 4: Tally your expenses
If you're in a creative industry, “some things that you enjoy doing are also business expenses,” says Garofalo. For example, a TV writer can deduct their Netflix subscription. Some freelancers hesitate to take deductions when their businesses are technically losing money. Garofalo counters: “If you’re doing normal things that writers do to be writers, from the IRS’s perspective, you’re a writer, and you should be writing those expenses off.”
Medows cautions that the IRS only allows up to $5,000 in deductions for start-up costs, and there are limits to what kind of deductions you can take. If you lose money for too many years, the IRS will eventually classify your business as a hobby, although the rules surrounding this are dense, even for the IRS.
To help you avoid frantic receipt-hunting, Wingspan's bookkeeping feature automatically flags any charges that could count as tax deductions -- in real-time. Sign up here.
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*This information is not intended to provide, and should not be relied on for, tax or legal advice. Wingspan is not a bank. Banking services are provided by Lead Bank, Member FDIC. Deposits are FDIC-insured through Lead Bank, Member FDIC. The Wingspan Visa® Debit Card is issued by Lead Bank, Member FDIC, pursuant to a license from Visa USA Inc.Your funds are FDIC insured up to $250,000 through Lead Bank.; Member FDIC.
