I recently had a phone meeting with my accountant to discuss the inevitable - TAXES. I’ve always found filing taxes to be incredibly confusing and the whole ordeal has only gotten more puzzling since switching from being a W-2 employee to an independent contractor. While I am by no means a tax expert, I do have a few tips for my fellow independent contractors to help get through the season.
Divide and conquer.
Keep separate business checking and savings accounts and a separate business credit card. You may even want to create a dedicated savings account solely for your tax payments. Having all business transactions separate from your personal transactions makes it easier for you to track and calculate your expenses over time. If you’re saving for a big purchase, business or personal, you don’t want to get your finances mixed up and you especially don’t want to accidentally spend money set aside for tax payments. Save yourself the headache and divi up those accounts!
Take notes and keep organized.
Saving receipts in a shoebox all year or simply relying on your online banking system is not enough. Receipts and transactions listed in your account can be obscure making them rather useless should you ever be audited (knock on wood!). I’d highly recommend keeping a spreadsheet or using accounting software to track your finances and add detailed notes about your expenses. These tools will also help you better organize your finances, enabling you to more easily categorize your expenses. The more meticulous you are about the financial records you keep, the less frustrated you’ll be when filing taxes.
It’s often advised for the self employed to put aside 30% of their earnings for taxes just to be on the safe side. While this percentage may make you cringe, it’s far easier to stomach than a tax bill you don’t have the funds for. Having to play catch up on taxes is stressful and costly. The best thing you can do to avoid such a mess is save, save and save some more.
If you’re as confused as I am by the ever-growing complexity of federal, state and local tax laws and regulations, you might want to consider hiring an accountant. There were big changes made in 2013 - some of which directly effect those who work from home. To avoid mistakes or possibly overlooking valuable tax breaks, consult a pro.