How the Self-Employed Can Prepare for Tax Season All Year Long
Some people think that taxes are just something you need to deal with once a year. It may be stressful—but hey, it's only one day and then you can get back to business as usual. Unfortunately, this is far from the truth for anyone who is self-employed. Being self-employed means you have to prepare for tax season every day of the year. If you don't, you could lose money and valuable time when Tax Day rolls around. Want to learn how to better prepare for tax season? Here are some of the steps you should be taking year-round as a freelancer or self-employed person.
1. Have a Savings Account Specifically for Taxes
You shouldn't view this as extra money for a rainy day or emergency funds—this account should only be used to save money for taxes. You'll have to do some research to determine what your tax bracket is and how much you have to put aside, but an average estimate is 25-30% of your income. While you're setting up bank accounts, make sure to have a separate checking account for your business that deals with all of your expenses and income. This way, when tax season rolls around you can easily distinguish your business spending from your personal spending.
2. Have an Organized Year-round System for Recordkeeping
Keeping all of your business-related documents and spreadsheets in one place will make everything so much easier! You don't want to overlook vital expense or income documentation when tax season comes around.
In order to keep your system organized, you should also be tracking your income and expenses every month. Make sure you're recording your fixed and discretionary expenses as well as the payments and invoices you receive. Keep them all together to ensure they don't get lost and as a result, you'll have a clearer idea of your long-term budget.
3. Track Your Deductibles Accurately
If you want to be able to take advantage of all the deductibles a self-employed person can claim, then you need to keep an accurate, detailed and organized record of your spending. For example, any miles you drive for work can be deducted as long as the number you come up with can be proven and is accurate. Using a mileage tracker app would help with this: Not only will it record your miles accurately, but also important details such as where you traveled and what the trip was for. Details like this will help you get that deductible. This will save you bundles in the long run.
4. Save Receipts
Receipts are essential to your taxes! They help keep track of your income and spending while also allowing you to see what your deductibles could be. If you were to be audited, receipts provide all of the details needed to prove that your spending counts as a deductible. You can take pictures of receipts or scan them in order to have a more organized digital record.
5. Pay Your Quarterly Taxes
This one is essential to remember! If you don't pay your quarterly taxes, you'll be penalized by the IRS. When you work as an employee, money is usually automatically taken from your paycheck to pay taxes. But when you're self-employed, it's up to you to make sure it gets done. This means paying taxes on the 15th of April, June, September and January. The 1040-ES form can help you figure out how much you would owe in quarterly taxes.
6. Consider Using a Financial Planner
If you're finding that the task of managing and organizing your taxes is becoming too time-consuming, look into using a financial planner to help ease some of the stress. Whether they offer tax planning services or not, these professionals will be able to streamline much of your "preparation" work.
When you're running your own business, there can be a lot to keep track of! One thing you should always prioritize, however, is preparing for tax season. The steps mentioned above will not only save you stress, time and money during tax season. They will also help your business function much more smoothly.