If you filed your taxes last week, congrats: The worst is over.
Doing your own independent contractor taxes can feel messy, overwhelming, and, yes, taxing. But it doesn’t have to be that way. The trick is to be prepared ahead of the due date.
“It’s not just about banging out a tax return,” Jonathan Medows, MBA, a certified public accountant licensed in New York, New Jersey, and Maryland. “It’s about sound tax and financial planning. That’s just not something you whip up on April 14.”
There’s a few foolproof ways to make next year’s filing less painful. Starting to think long-term and getting your books organized now means that you won’t have to scramble next April.
Keep track of where your cash goes.
Watch and document your expenses on a regular basis, whether that’s weekly, monthly or any other cadence that makes sense for you. Keep a file with your credit and bank statements, plus any incorporation documents for insurance certificates that pertain to your business. Digital versions of these will suffice—don’t worry about paper receipts.
Medows recommends using a spreadsheet or bookkeeping software that will keep a record of several years’ worth of transactions and forms. (And, ICYMI, Wingspan’s very own bookkeeping feature not only helps you stay on top of your spending but highlights where you may be able to make additional deductions on your next tax return.)
Put money aside for tax payments.
As a self-employed worker, you probably noticed (and rejoiced) that your checks had no taxes taken out of them. More money, right? Not so fast. Experts say that freelancers should set aside 25 to 30 percent of every payment to cover taxes. If you expect to owe $1,000 or more in taxes for the year, you must pay quarterly estimated tax payments or you may have to pay a penalty. Here’s how to figure out if you should pay estimated quarterly taxes.
Maintain a steady source of revenue.
Tracking your money also means being vigilant about your monitoring your income. Take note of any clients who delay your payments, Medows advises. And don’t be afraid to withhold your services until you’re paid or to add a late payment fee on top of your rate (Wingspan’s invoicing feature charges clients late fees automatically.)
Unreliable income isn’t just stressful. It could mean you might have to dip into your savings in order to pay estimated taxes down the line. Changing up your roster of clients in the middle of the pandemic is easier said than done, try to work only with people who will pay you your rate in a timely manner. Doing so will ensure that you’re making enough money to cover what you’ll eventually owe on your tax return.
Consult the pros.
If you’re super busy, disorganized, or just not confident in your math skills, you may want to consider hiring an accountant to help with your taxes. If you choose to do so, get in touch with one sooner rather than later, Medows advises. This will be an integral relationship for your business and you’ll want to have built up a foundation of trust, rapport, and understanding by the time tax deadlines roll around.
This is also a great time to start thinking about who else you’d like to consult for your business — perhaps a financial planner to help with your retirement savings or an attorney to advise on incorporating your company. Remember: The consulting fees for these types of services for your business are tax deductible.
Make it a habit.
“Being [your own] boss means you have to deal with everything,” Medows says. You can put off your taxes at the very last minute if you want, but you’re better off taking taxes as seriously as the rest of your work. In the same way that clearing out your inbox or checking in with clients may appear on your regular to-do list, so, too, should tracking your earnings and logging your expenses. Eventually, these preparatory measures will become second nature—and save you many sleepless nights ahead of next year’s filing deadline.
In addition to bookkeeping, Wingspan helps you get paid on time through its streamlined invoicing service. Sign up for a free 30-day trial here.