Imagine this: You recently lost your job or your job lost you, and now you have decided to take some freelance consulting job to pick up some spare cash. Or, you are finally starting that side hustle you’ve always dreamed of and your Etsy store is about to be up and running. Sound familiar?
You fill out a W-9 in order to get paid, and a few weeks later a check comes in the mail made out to you. You are overwhelmed with excitement because this is the first time no taxes have been taken out of your paycheck and you are feeling flush with cash. At some point in 2020, you’ll be getting your first 1099’s in the mail, but what should you be doing here in 2019 to make sure your ducks are in a row come tax filing time?
The reality is that most of you who earned your first 1099 will likely file Schedule C (sole proprietor) with your first year of income. Some of you may set up an LLC, but you still may be uncertain about what you can deduct or how exactly incomes taxes will be paid. The LLC is usually to protect you with limited liability and can have different tax structures beyond being a sole proprietor. Here are the financial moves that will keep your side hustle on the straight and narrow.
Make sure you set up a business account and a business credit card. It’s incredibly important to have an immediate separation of church and state. You never want to run the business expenses through a personal checking account or your personal credit card. It will be confusing to someone (i.e.- the IRS) looking at your business to understand why you would pay for business expenses through a personal account. This is especially going to be true when it comes to paying for things like meals, entertainment, and travel.
Set up an estimated tax payment account. Ideally, you will want to take somewhere between 25% to 30% of your check and put that money in a separate tax account. Depending on your other w-2 income from your family and the actual expenses you have in the business, you’ll ultimately have a better idea after a full year where your real tax liability will stand. In year number two, you’ll get used to paying estimated taxes. It’s always better to err on the higher side of 30% so you can be safe rather than sorry.
Keep track of all startup costs. Did you have any specific equipment, furniture, or other items that needed to be bought to start your business or your freelancing job? Did you have to purchase a new car for the business? Did you specifically build a dedicated home office? Some or all of these expenses may be deductible to your business. E-mail me at [email protected] to get my special 60 business tax deductions guide. You may also want to have a billing system set up through a program such as FreshBooks or QuickBooks to keep track of all of your business income and expenses.
Driving your car. Make sure you keep a log of all of the miles that you drove during the course of the year that was attributable to your business. You may actually deduct the expenses related to the upkeep of the car or the mileage which will be key to look at during tax time. Generally, you cannot take the mileage and the wear and tear in the same year for car expenses.
All of your marketing costs including business cards, stationery, supplies, mailing costs, and much more may be able to be deducted off your bottom line. What you should consider is having business accounts at the car wash, the office supply store, your bulk warehouses, etc. to be sure that the business is clearly paying for business expenses.
Ongoing education for your income. If there was ongoing education, continuing CE credits, or licenses, then much more may be deducted as well.
You should look into all and any necessary insurance you may need. Not all freelancers need to have insurance protection, but if you are in a business where you could be sued, then errors and omission insurance could be necessary. If you are storing important client information, you may need to look into cyber-liability insurance.
You should make sure that you have a standard contract that you can use with people you are doing freelance work with rather than having an arm’s length handshake deal. Specify the work expectations, the rate of pay, the length of time the contract will exist, and overall terms. If you have work that is going to be proprietary, then specify who gets to keep the work product and have a non-disclosure agreement (NDA) if it makes sense.
These expenses are not a complete list, but just a few you should look at to help you start a smart freelancing business. Get it all straight, and you will do what most business owners want to do which is pay as little tax as possible and keep as much of your bottom line to plan for your financial future!