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Eek, I hate taxes with a passion. In fact, anything accounting related sends me into a state of sleepiness… or is that sleeplessness?!
Either way, as a freelancer you're gonna have to deal with taxes at some point. And if you want to avoid making some major mistakes, you'll learn to plan in advance, right?
“Um, sure Lise… I'll plan.” — I see you nodding your head with me, but are you REALLY getting it? Tax mistakes can cause you major headaches and can be the death of your business if you don't get this shiz sorted upfront!
So, if you're just starting out, or even if you've being doing this for a little while, here's some ways to plan for tax time, well in advance, and avoid making a mistake that costs you more than your yearly rental/mortgage repayments!
Note: While the advice below focuses on those based in the USA, your country will have similar requirements. You can check out details for other countries in this book.
4 Tax Mistakes to Avoid
#1: Failing to submit quarterly tax estimates
If you're a 1099 employee or freelancer, it's up to you to file your tax estimates quarterly. Failing to do this will result in penalties. This is based on the assumption that you're likely going to owe more than $1000 come tax time, which you should if you're making even a small amount of money.
Estimate your tax payments by chatting to an accountant. This is not something you'll want to try and figure out yourself. It will largely depend on your tax rate. So bite the bullet early on and set up a recurring payment to the IRS. Yes it's painful, but it's far less painful than owing $30k plus come tax time!
#2: Undercharging clients
I know it's difficult when you're just getting started, to charge what you feel is a true reflection of your skill, but undercharging doesn't pay the bills and it won't reduce your tax expenses either.
Charge what you're worth and don't forget to factor in things like your operating overheads, insurance and your taxes so that your hourly rate truly reflects what it costs to run your business!
If you're not sure how to work out your correct hourly rate, here's a simple formula I use to do this:
Average Hours Worked per Month (x your current wage + 10%) + Monthly Overheads/Average Hours Worked = Hourly Rate
Here's how that might look in practice:
In this example, we’re going to assume you’re a part-time graphic designer.
Using the formula, we’ll assume:
- Your current wage = $30 + 10% = $33
- Average Hours worked per month = 20
- Monthly Overheads = $110
$660 + $110 / 20 = $38.50 is your hourly rate
Remember, you’ll need to factor in tax here too.
#3: Not tracking income and expenses
This was something I struggled with (and failed to do) in the first 12 months of my business. In fact, it's still a struggle. I am not a numbers person and accounting practices bore me too tears! But, if you're not tracking income and expenses, how can you know whether your business is making any money and how much tax you should be paying come April?
Make it easier on yourself and hire an accountant or bookkeeper, that's what I did. And use a program to keep it all in the cloud, my preference is Freshbooks, because of how easy it is to use and how I can setup logins for my accountant! Lifesaver!
#4: Claiming everything
Be careful what you write-off as a business expense. You cannot write 100% off, so if you try to do this, you're going to raise some red flags with the IRS, something you do not wanna do!
If you're smart, which you are because you're reading this blog post…! You'll have listened and got yourself an accountant. They are properly qualified to tell you what you can and can't claim when it comes tax time. And if you're ever unsure, the IRS's self-employed individuals website gives you the run-down you need.
I hope you find this helpful! I know how icky taxes can be, but if you just address it, plan for it and then get it sorted, you won't have any issues at all come April!
Need some help starting your own Side Hustle business? Want to learn how to find the right clients and figure out where your skills will actually make you money? Then you need the new OFS Course — Side Hustle Blueprint, launching in January 2016. Join the early notification list to grab 70% off!
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