Planning for Next Year’s Tax Bill
Since we’re closing in on 2009, it’s time to start doing some New Year’s Planning.
The first item on your agenda should be something that we all love to deal with – taxes. If you haven’t done so by now, make an appointment with your tax accountant so you can get ready for April 15, or whatever the magic day is in your country.
Here’s what to take to your accountant:
- Your profit and loss statements. Create one that shows how you’re doing this year vs. last year and another that shows how you’re doing vs. your budget. This begs the question of timeframe: Should your statement go from January 1 to the date of your accountant’s meeting? Or should it span from January through the end of October? Should you also bring P&Ls for each month? Ask your accountant what he or she would like to see.
- Accountants are notorious for looking at expense figures and zeroing in on the biggest number. For example, your operating expense may be Advertising and Promotion. Your accountant will probably ask you what you spend the money on. So, prepare a report that provides the answer.
- On the revenue side, you may be asked where the money is coming from. As in, who are your clients? Do they fit your Ideal Client Profile? Are you having success in bringing in more of them? Prepare a report that breaks down your sales by customer.
- If you’re subject to quarterly estimated tax (or whatever your country’s equivalent is), prepare to give your accountant a report on how much you’ve paid so far. In the United States, the fourth quarter estimated tax payment isn’t due until January 15. So, if this year has been better than expected, you have time to sock away some extra money so you can pay above the estimated amount. You don’t have to do this, but it can cushion the blow on April 15.
- Your business balance sheet. While you may not find it as fascinating as your P&Ls, your accountant will find it quite valuable. The balance sheet offers an up-to-the-minute snapshot of your business’ cash position. So, bring the most recent balance sheet that you have.
- A brief report on how your business is doing – and why. By “brief,” I mean one page at the very most.
When you meet with your accountant, be sure to have some way of taking notes. Bring your laptop, PDA, or just a pen and paper. Focus your note-taking on what the accountant is advising you to do. And pay special attention to the deadlines that may be involved. There may be things you’ll need to do before December 31 if you want them to apply to this tax year. Or, if you’re funding your retirement account, you may be able to wait until April 15, 2009.
Also, be sure to get an estimation of what your tax bill will be come April 15 (or whenever that magic day is). Since you’re being proactive and planning ahead, you have time to bank the extra money if you’re looking at a tax bill. This is much better than waiting to have your tax returns prepared in February, and then finding out in early March that you need to come up with $2,000 by April 15.
After your meeting, send your accountant an e-mail or a letter covering:
- The specific financial statements that you brought to the meeting. Be sure to note any important points that arose from your discussion of them.
- The advice that your accountant gave you, including the deadlines that apply. Are those deadlines on your calendar? If not, log them now.
- Repeat the numbers that the accountant gave you. For example, if the accountant advised you that your federal tax bill will likely come to $5,000, say that.
By going through the above process, you’ll set yourself on the road to being proactive about taxes, rather than being the victim of last-minute surprises.
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I actually have my own plan for this but after i saw these line: When you meet with your accountant, be sure to have some way of taking notes. Bring your laptop, PDA, or just a pen and paper. It gives me a warning not too take it so lightly. And its also a good future plan before new year.
Download directly to Quicken / Quickbooks from your bank each month. Record to the proper categories. Print nice reports for accountant. Add in mileage report and life is good. It’s so much easier these days.
some good tips here, but i would have to say you shouldnt be waiting to see your account to get your tax money together – just set money aside each month or from each check and then come year end you’ve got a bundle set aside already.
I did go to my accountant last month and just got an estimate of what i’ll owe and while I’m still going to have to fork over a chunk of change, It will probably NOT be all of what I stashed away, so tax time wont be a time of tears for me, yay!
Good advice.
I too have put money aside from every gig I got this past year. Hopefully, I maybe able to save some of that cash and take a vacation for next year! Again, I will be using TurboTax online to file. It’s easier for me!
I hate April 15th. With a passion.
On the other hand, it’s nice to be working with income.
Have anything more basic for the beginning freelancer? This all goes right over my head and I’m looking to start freelancing next year.
What a good advice !
To Um: just get an accountant firstly and get started with them, basically you want to keep all your invoices and expenses in a separate pile or even in folders so that you (or someone else) can organize them later. Since you are new at this, it will just take a bit of time and practice to get it working smoothly.
I can’t stress how important you accountant is, I have worked for them in the past and I know how much value they can bring to your business.
To take it a step further, one advice I got was to keep some of the income you receive in a separate account to pay the taxes at the end of the year. This way you are not left with a big bill come April.
I use a separate account for all my receipts and I do not draw 100%, at least I try not to..;P.
@Um brings up some good points. In this response, I will try to address some of them:
1. Find an accountant and have him or her set up your business books. Be sure that you are comfortable using the accounting software that your accountant recommends.
2. Get training in using that accounting software. Much of this training will be of the “how to do data entry properly” variety, and, trust me, you’ll get bored with it in a hurry. (Hey, we’re creatives. Mundane things like data entry tend to make us yawn and fall asleep.) Despite your boredom, stick with the training, because…
3. …that data that you’re learning to enter is yours. It’s based on what you’re doing in your business. (Much more interesting than an accounting class exercise, isn’t it?) Won’t be very long before you’ll be generating reports and thinking up ways of making business better so that your reports will look better.
Tax time can be hectic for the professional website designer, writer, or whatever you do. I try to keep good records throughout the year and get my taxes done ASAP so I’m not rushing anywhere or missing out on tax cuts or *gasp!* not paying enough throughout the year.
Good info. I have a background in tax software, so up till this year I have always done my own taxes, but I think this is the year I hand it off to someone else. This information will come in handy. Much appreciated.
I don’t see the need to write up a summary of how your business is doing. And most freelancers know to pay taxes quarterly. I know in the US you can be penalized for not paying quarterly.
I’ve also found that I save time by knowing what to itemize and deduct and such. So I can pretty much give my accountant an already-calculated sum of various line items such as total untaxed income.
Freelancers should also bring any other forms they get from clients. If you pay taxes on certain jobs, make sure your accountant knows this!
Oh if only I owed $2,000 for the whole year!!
Good post, Martha! I know you mentioned in another post that you use MYOB as your accounting software. I’d be interested to hear what other freelancers are using and how they like their accounting software. Thanks!
QuickBooks is your friend. I’m an S Corp and you would think it’s super complicated, but it’s not. I added the tax module and all goes so smoothly. Overall you might need to pay over $300 per year to have the proper tools to do your books and taxes and all, but you stay in control by doing it yourself. And you get really satisfied because you learn something new. It makes you understand money and it is sometimes really useful for your actual freelance gigs. And you can afford those $300 anyway because you charge your clients the adequate price, right???
Any lone gun freelancers here use TurboTax? I’ve been having my tax returns prepared professionally for 12 years, but last year my preparer was slow, unresponsive, and overlooked a pretty obvious deduction. I’m thinking of just doing it myself, but my primary concern is making sure TurboTax is thorough on deductions.
MWorrell,
I use TaxCut through H&R Block’s free-file program. It allows me to use Schedule C at no extra charge – and walks me through each line item of both the 1040 and all the separate schedules and forms.
I’ve also taken the time to educate myself about what is and isn’t deductable, which I think is very important. I’d rather know “why” I’m paying taxes so that I can reduce them next year throughout the year, than pay someone to figure it out for me. But I’m just stubborn that way.
I also use Money to track my expenses – just one file for all my business expenses, which I then print out at the end of the year. It’s nice that it tracks the individual line items for me (I planned it that way). No messing around with individual receipts in January – just one clean piece of paper. The receipts get filed, of course… just in case.
Good luck!
Man this sure could have helped me last year!
Am digging around for any p/l statements for freelancers/service providers. Anyone care to share?