4 Tips To Help Solopreneurs And Freelancers Survive Tax Time

stressed business woman with hand on head looking down on desk

Another tax season wrapped up for Dawn Mentzer Freelance Writing, LLC.

 

[Sighs with relief.]

 

Over my past seven years as a self-employed freelancer, I’ve experienced the good, the bad, and the downright ugly. I’ve learned some lessons—some painless, others excruciating.

 

I’ve listed them here, in hopes they might help you and other solopreneurs avoid stress (and distress) through your tax preparation process.

 

Four Tax Time Survival Tips For Freelancers and Solopreneurs

  1. You don’t know what you don’t know.

Unless you are an accountant or professional tax advisor, I recommend getting help. Reputable professional tax preparers/advisors are on top of the latest changes and rules. They know what business expenses are deductible and whether you’ve categorized them appropriately. Having someone with that knowledge to guide you and raise red flags on bookkeeping that’s amiss can potentially save you from falling into hot water with the IRS and state. And recognize that bigger doesn’t mean better. I used a larger accounting/tax preparation firm, but after a few years of not getting timely responses to questions and being treated like just a number, I switched to a solopreneur tax adviser/preparer. He has been far more thorough and attentive—and less expensive.

 

  1. It pays to keep your act together all year long.

The more organized you are year-round, the more painless the tax return filing process will be. Track your income and expenses when they occur rather than allowing deposit slips and receipts to pile up. For my business, I use QuickBooks online, which I’ve found to have intuitive software with the intelligence to automatically categorize expenses correctly through ‘remembering’ what I’ve entered in the past. Regardless of what system or software you use, you need to put forth effort to make sure you haven’t missed anything that will impact your taxes. Good luck to you if you ignore that responsibility until tax time is upon you!

 

  1. Yours and your clients’ records might not match.

It happens. For example, I discovered a client mistakenly included a payment they made to another vendor in the amount on my 1099. I also had a client who included payments made in the new tax year on the 1099 for the tax year prior. To make incidents like these less of a hassle, consider confirming 1099 amounts with your clients before they send their forms to you. I’ve discovered it’s far easier to verify their records match yours in advance of when they or their accountants prepare and submit their forms. By doing so, if you find discrepancies, you and your clients can investigate and correct them right away. If errors are in your clients’ records, you’ll save them the trouble of issuing a corrected 1099. If the errors are in your records, you’ll be able to make the correction and ensure you’re including accurate income amounts on your tax return.

 

  1. What you don’t know could hurt you.

Twice—that’s right, twice—in my seven years of self-employment, I underestimated my revenue and I failed to pay enough tax. As a result, I had to write a substantive check to Uncle Sam upon filing my taxes for those years. That hurt—especially because I had to also cut a check for my quarterly estimated tax payments by April 15. Double whammy! My suggestion to you is to watch your net income closely and adjust your quarterly estimated tax payments if needed so you’re not stuck owing a bundle at tax filing time. In my case, I’ve found checking in with my tax advisor mid-year has helped. I send my profit and loss statement and other info as requested to him at least once during the tax year, so he can let me know if I should increase or decrease my quarterly payments.

 

Keep Calm: And Make Tax Time Less Taxing

Paying taxes is not the most glamorous part of having your own business, but that doesn’t mean it needs to be a massively difficult ordeal. I hope considering these lessons learned along with getting the help of a qualified tax advisor will help you minimize some of the stress that accompanies tax time.

 

Your turn! What tips can you share with other small business owners to help them make tax time less tumultuous?

One Easy Way To Save Yourself And Your Clients From A Headache This Tax Season

While most clients have their accounting act together, some don’t—and that can create problems for you as an independent contractor when it’s time to prepare Woman with headacheand file your tax returns.

 

I’ve gotten 1099 forms at the end of the tax year that either under- or over-reported the “nonemployee compensation” clients paid me throughout the year.

 

If the income records you report and those of your clients don’t match up, it’s a big deal. If they under-report, they’ll be paying more tax than they should be. If they over-report, it will bring you a boatload of aggravation. You’ll be stuck backtracking through records to show them where they made their error(s), and then you’ll need to wait until you get a revised 1099 before you can file your taxes. The income in your accounting data (whether in a system like Quickbooks, in Excel worksheets, or logged manually in a notebook) needs to match what your clients are saying they paid you.

 

After getting several inaccurate 1099s last year and dealing with the headache (and putting my clients through the hassle) of requesting that they be reissued with the correct information, I decided to get proactive in confirming our information is in agreement this year.

 

Here’s how…

One Easy Way Solopreneurs Can Make Tax Season Less Painful

Whether you use Quickbooks, Excel, or some other method of tracking your income by customer, export or create a file that shows (at the very least):

 

  • Dates payments were received
  • Check numbers (or other reference numbers if paid in a different way) associated with each payment
  • Amounts of payments
  • Sum of all payments for that tax year

 

Here’s a sample of what that might look like.

Sample-Client-Compensation-Record

I’ve sent one of these to every client who did at least $600 worth (the magic number for when that income needs to be reported on a 1099) of business with me in 2014.

 

By doing the same, you can show your clients what your records say so they can check to make sure theirs are in sync. That way, if you’re not in alignment, you can investigate and resolve the discrepancy BEFORE they issue their 1099s to you.

 

Keep in mind, whether your clients are doing their own bookkeeping or if they outsource it to someone else, mistakes can—and do—happen. By proactively exchanging information as tax season approaches, you might spare yourself and them from major headaches.

 

By Dawn Mentzer

 

Speaking of sparing yourself headaches, if you’re struggling to keep up with writing blog content that grabs attention and gives your readers value, let’s talk!

 

Image of woman with headache courtesy of stockimages at FreeDigitalPhotos.net

 

Please note that this post is not meant to serve as professional accounting advice. It’s for information purposes only.