No one actually knows for sure what the logic behind the IRS audit red flag is. Over the years, accountants have seen commonalities within their client base and have noticed trends in businesses that seem to be audited more often than others. This article isn’t meant to scare you; it’s meant to encourage you to keep solid books.

Bookkeeping isn’t hard. With the right accounting software it should only take a freelancer 30 minutes or less per week to do. Continue Reading

Credit: photo by kozumel/flickr

There’s a point in every business when having a CPA (Certified Public Accountant) becomes necessary. Your taxes get too complicated for the local tax preparer, you need to start thinking about saving for retirement and you generally need to make sure that you’re bringing in enough money to grow, at least a little. For freelancers, however, identifying that point can be tough.

A part-time freelancer with a day job almost never needs a CPA. Even someone who has been freelancing full-time for a while may not need a CPA. And if you don’t need a CPA yet, that’s fine — why pay for an accountant’s services when all you really need is some help from a tax preparer? Continue Reading

This post is a guest post from Allan Branch, a one time freelancer who created LessAccounting for freelancers who need to keep track of money or send invoices.

If you’re reading this you’re probably not an accountant so bookkeeping is painful, boring and no one likes it. Let’s see if we can make this as painless as possible. Let’s remember that the reason to keep tidy books is to maximize your tax deductions. I make more on an hourly basis when I do my taxes than any other time of the year. If I spend a few hours properly putting everything together I can save (earn) thousands of dollars in reduced tax payments.

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If there’s one thing I’m bad at in this whole freelancing business it’s bookkeeping. I mean, I’m a writer — and frankly, one of the things that draws me to writing is that it’s not bookkeeping. If you’re a writer, a designer, or even a coder, chances are you were drawn by the possibility of putting words, images, and code together in creative ways, not by the prospect of meticulously recording financial transactions.

The bookkeeping and accounting a freelancer has to do boils down to three things:

1. Recording invoices and payments,
2. Recording expenses, and
3. Computing and paying your taxes.

For the past year-and-a-half, I’ve been using LessAccounting to handle the first two, and sort of “winging it” to handle the third. I like LessAccounting, and with a little creative data entry (e.g. holding off on entering payments in months when I get several payments and entering them during slower months; the free account limits the number of payments you can enter in any given month) I’ve managed to do pretty well for myself with a free account. But that’s changing – I’m developing more clients and more steady invoicing and payments to record, and at the same time my income is growing to the point where taxes are becoming a nightmare.

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Permit me to start this article with a confession: It took me more than a decade to make friends with accounting.

Not that accounting didn’t try to become my friend. It kept coming around my freelance business saying that I needed to deal with it. After all, I did need to know how much profit or loss I was generating so that I file a tax return.

So, I hired a bookkeeper to generate quarterly financial reports. Then, when tax time rolled around, she generated a year-end report for me and my tax accountant.

When it came to accounting avoidance, this system was superb.  But there was a problem. The bookkeeper’s reports were seldom correct. I had to go through them, line by line, to see which income and expense items had been incorrectly logged or omitted. Little did I know, but my accounting education had begun.

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Photo by yorkd.

A few years ago, I did a couple of projects under the table for a local company. They paid me in cash, with a quiet understanding that they didn’t plan to issue me a 1099 and I didn’t plan on declaring that income.

I don’t work that way anymore, but I know the appeal. There are a lot of negatives to such an arrangement — which led me to make sure my income taxes actually reflect my income — and it’s worth giving them some consideration before going one way or the other for cash-only arrangements.

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Tax time can be especially stressful for freelancers: despite paying estimated tax payments throughout the year, it’s rare that a freelancer doesn’t still have to come up with some money for April 15 — or come up with a long enough list of deductions.

There are quite a few deductions available to freelancers that may not seem obvious when you first sit down with all those 1099s and receipts. But as long as you have the right documentation, you can write off plenty of deductions you may never have thought of.

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Photo by jenn_jenn.

I recently concluded a series of articles on New Year’s Planning. And here we are, in the New Year, and I have it on good authority that some of you still haven’t created your 2009 client acquisition plan.

I’m also hearing that there are some freelancers who have yet to do an annual budget.

We’ll start with client acquisition. I’ve created a free Excel application that will allow you to track your efforts. Download the 10 Business-Building Tools Tracker file and open it in Excel. Since it’s in Read-Only format, save the file under a different filename so you can work with it.

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Photo by Shermeee.

In this article, I’m going to talk about how you can hold yourself accountable on a monthly basis. The first two articles in this series covered:

1. Daily accountability
2. Weekly accountability

The focus of the first two articles was on things that you can do with words – evaluating your day and your week. When we move up to the monthly level, the focus shifts to numbers. Which means that it’s time to talk about accounting software and your business. Yes, I know that this is a sore spot for many creatives. It was for me for many years, but I got over it.

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Photo by decor9.

This post is the first half of our two-author, two-part series on smart saving.

Many Freelance Switch readers are probably aspiring professional freelancers with a day job. Shama Hyder earlier provided 5 steps for switching from side gig to full time. There’s one really important step that Shama alluded to and that I’d like to expand on: savings.

Before you jump into full-time professional freelancing, you want savings. (Read further below for an explanation why, beyond the obvious.) Do not venture into full-time freelancing without savings.

General Savings Tips

1. Save for the future.
   Don’t save for next week, next month, or later this year. Lean periods in freelancing careers can and do ruin marriages and family relationships. Think like a business owner, not like one person constantly looking for freelance work. Use longer-term investments such as bonds or blue chip stocks (that you’ve researched well). Continue Reading

When I came up with the headline for this article, I figured that many freelancers are so busy that they probably don’t have any time to organize their tax information before they hand it over to their accountants. We’re all so focused on our businesses—who has time to do nice for their accountant? You do, actually. And the payoffs could be big!

It really doesn’t take much to get things together to make things easier for your accountant, and perhaps save time. If you’re like me and you toss pay stubs and receipts into one large envelope during the year, you may want to break things up so your accountant can easily work through your taxes. This saves your accountant time, and it saves you money. Also, I don’t use anything fancy for invoicing (something I need to change, I suppose) but even organizing your Quicken files can be a huge help for the accountant, save you money, and offer more time for you to ask questions and help your business.

You’ll find that little things will make tax time much more manageable for you and your accountant. Here are some easy things you can do to get organized. Continue Reading