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

The year is winding down and once the holidays are over, tax season is upon us. As a freelancer, there are certain things you should be thinking about before 2011 is over to set yourself up for some tax benefits in 2012.

We’ll delve into a couple of timely tips, and point you in the direction of a few handy articles to find out more!

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Want to make your tax preparer the happiest person on the planet? By spending a few minutes on your financial paperwork now, you can make your life easier, as well as theirs.

As a freelancer, it’s easy to tell yourself that your financial paperwork really isn’t that complicated and that you can put it off indefinitely. If you do so, sometime in early March — assuming that you’re based in the U.S. — you will frantically go through all your old receipts and invoices, trying to run some numbers that you can hand off to your tax preparer, so that she can finish your tax return in time for that April 15th deadline. I’ve taken that approach more than once myself.

But there is a perfectly valid alternative to spending most of March freaking out, provided you’re willing to put in a little time now. You can get your paperwork in order early.

Start a Folder and a Shoebox

I realize that we’re all living in the digital age and hard copy is just one more thing to lose, but the fact of the matter is that a large portion of the paperwork you’ll need for your taxes is not going to come electronically.

So, write ‘Taxes’ and the year on a file folder and put it in your filing cabinet. Every time you have something that you know that you’re going to have to give to your tax preparer, put it in that folder. It’s harder than it sounds, but it’s necessary.

The ideal result is a shoebox with neatly organized receipts inside and a report totaling up your business expenses in different categories.

You also need some sort of storage device for your receipts. I use shoeboxes because they’re free, although I don’t ascribe to the paperwork philosophy of ‘throw it all in and let the tax preparer sort it out.’ Personally, I use two shoeboxes — one for personal receipts and one for business receipts.

I really ought to have a third, for medical expenses and other receipts that can be tax-deductible in the right situation, but since those are fewer and farther between, I generally just put them straight into my folder. Continue Reading

While the end of the year is likely not in the minds of many, it’s closer than you may think.

So before the ball drops and that tax deadline gets even closer, it’s a good time to think about the many things you can do to prepare for the end of the year–and the promising year ahead.

Here are 4 tips to get you started.

1. Create a New Filing System

If you’ve been meaning to find a better way to get organized, now may just be the time to do it. Put new systems in place for organizing your files. I work out of my home office, which is also a hub for my personal paperwork–so having a work file cabinet and a personal one was key to helping me stay together. Continue Reading

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As a freelancer, you’re independent. No one can tell you what hours to work or where to be — provided you complete your work to your client’s satisfaction, you’re free as a bird.

At least, that’s how the law works. The realities of working as an independent contractor can be a little different, especially when companies are willing to do things that don’t really meet best practices in order to save some money.

No matter what your clients think, though, your independence is valuable, to the point that you may even be able to put a dollar amount on it.

Learn how to maintain your status as an independent contractor and the tax benefits of doing so.

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In this issue of Ask FreelanceSwitch, we look at getting ahead as a student and transitioning from student to freelancer. Ask FreelanceSwitch is a regular column here that allows us to help beginners get a grip on freelancing. If you have a question about freelancing that you want answered, send an email to askfreelanceswitch@gmail.com.

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In this issue of Ask FreelanceSwitch, we look at contacting agencies for work and business structures. Ask FreelanceSwitch is a regular column here that allows us to help beginners get a grip on freelancing. If you have a question about freelancing that you want answered, send an email to askfreelanceswitch@gmail.com. Continue Reading

credit: David Reber's Hammer Photography on Flickr

With 2011 just around the corner, you’re probably thinking about closing out the books on this year. You might be considering what you need to get your taxes done and generally start the year off right. But 2010 isn’t quite over and there are still a few things that you can do to improve your tax situation right now.

I talked to Travis Raml, a CPA working with clients in Maryland and Virginia, to get some tips on how to end 2010 right — at least in terms of taxes. Continue Reading

If you work with clients based in the U.S, you’ve probably received a Form 1099-MISC. That’s the form that a business uses to report money paid to contractors, as well as to report other income. You should receive a copy of the form from your clients by January 31 of each year. Your clients who issue Form 1099s also send a copy to the IRS, letting them know how much income you really ought to be reporting on your taxes.

But this system is notoriously full of problems. Maybe you didn’t actually receive your copy of the form. Or maybe your client reported a number to the IRS that had nothing to do with what they paid you this year. Or maybe your client went out of business before they could even get around to filing their taxes. Whatever the circumstances, if you’re a U.S. taxpayer, you need to get that paperwork straightened out so that the IRS doesn’t hassle you about incorrect numbers.
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For many freelancers, records are the last things we think about. There’s a design to finish for a client or an accounting department to call about an invoice — there’s always something more important than handling records. But the fact remains that those records are important at some point. Whether you need to go back to an old version of a project for your client or you need to pull your copy of an invoice, having an organized system is crucial.

The biggest problem we face in getting our records into order (and keeping them that way) is that most of us work on our own. It’s hard to find time for tasks like filing when it’s just you. These tips will give you a few ways to streamline your record keeping.

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I haven’t thought about my 2008 tax return since April 15th. I probably would have continued to ignore it, except for the fact that last week I received a revised 1099 from one of my clients. It turns out that the form that they send me for my tax records was way off from what they had actually paid me, a fact that they hadn’t caught until just now. To make matters even more complicated, I haven’t actually worked with this client since May, 2008. I had to go dig out records from more than a year ago to figure out just how much trouble I was in. Continue Reading

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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