as featured on NewbornPhotography.com
We are fresh out of tax season yet barely a quarter into the current tax year. This is a great time to take a look at your business and make sure you understand your tax situation and all the pieces that create it. I often compare taxes to painting a room. No one really likes doing it, but they love the end result! The success is truly in the prep work and planning. I have compiled a list of items that I find many of my new freelance clients have struggled with to share with you.
Here are 5 Things every freelancer should understand:
1. Your Entity
Whether you are moonlighting, part timing, freelancing or going all in with a full-time gig. If you provide goods or services in exchange for currency you are in fact, operating a business. There is a handful of ways to structure your business. They each have different requirements, rules and tax implications. It is important to know your business entity and what it means. A vast majority of freelancers are sole proprietors or Limited Liability Companies (LLC’s) Many do not realize that they are both taxed the same way. This means that your net profit (Income – Expenses = Net Profit) carries to your 1040 tax form and you are responsible to pay self-employment taxes on it regardless of how much money you actually took out of your business. If you are a partnership you need to make a sure you have a proper partnership agreement in place. If you are considering forming an S-Corp for the tax benefits we should set up a call. There are points when converting to an S-Corporation makes more sense for your business. For the sake of the majority, the rest of this is written for those operating as Sole Proprietor, LLC or Partnerships.
2. Self Employment Tax
You are required to pay self-employment tax on your net profit. Self-employment tax is made up of the Social Security and Medicare however since you are self-employed you now get to pay both Employee and Employer portion. The self-employment tax rate is 15.3%. (12.4% social security & 2.9% for Medicare. For those who make over a certain threshold, there is another tax call Additional Medicare Tax which is .9%. You need to be aware of how much you are projected to owe so that you can make the properly estimated tax payments
3. Estimated Taxes
If your net income is over $1000.00 for the year you are required to pay quarterly estimated tax payments to avoid penalties. This means calculating your net income each quarter and then calculated the self-employment taxes above. You may also need to make state estimated tax payments. If these payments are not made you will owe the full amount at tax time with penalties for not paying timely each quarter.
4. What To Track
The revenue piece is easy you need to track ALL the money you receive in exchange for your services.
Expenses are a little trickier but really anything that you purchase in order to do business is an expense. Here is a list of most of the basic freelance expenses you should be tracking:
- Advertising & Marketing
- Charitable Donations
- Education (Seminars, Webinars, & Classes)
- Event Fees (conferences, Expos, Wedding shows etc.. )
- Home Office Deduction (your mortgage interest, rent, utilities check it HERE)
- Interest (on loans or business credit cards)
- Internet Service
- Legal & Professional Services(Accountant, Attorney, etc…)
- Mileage (to and from client meetings, jobs, buying supplies, checking your post office box, making bank deposit)
- Office Supplies
- Post Office Box
- Software (all of it photo editing, QuickBooks you name it)
- Studio Rent
- Sub Contracted help (Second Shooter, assistant)
- Subscriptions and dues (Bridal magazines, photography etc)
- Travel Expenses (if you travel overnight for a shoot or show)
5. How to track it
You know you need to track ALL income and ALL expenses. The easiest way to do this is to log it as you go. A spreadsheet would suffice but I recommend QuickBooks Online to all freelancers. QuickBooks will download transaction directly from your bank you just categorize into the right accounts and Viola! You can even take pictures of receipts with your phone enter the expenses that easily. When tax time comes you just print up the profit and loss and you are good to go. (your Accountant will love you) But even better than this is the fact that you can use QuickBooks yourself as a tool to build your business. If set up properly you can see what type of sessions are bringing in the most revenue and where you spending your money. You can invoice and accept payments electronically right in QuickBooks and with the phone app, you can take deposits at expos or on site. Everything is stored in the cloud so you never have to worry about backing up and you can access from anywhere at anytime from any device. You can dive in and really see what QuickBooks does HERE
IRS Estimated Taxes
Publication and Forms for the Self-Employed