Time to get on track with tax deductions
October 5, 2010 8:37 AM Subscribe
As a freelancer, how do you keep track of your tax deductions?
I've recently transitioned into freelancing full-time as a graphic + web designer. I've got family in the accounting business who are graciously advising me and bringing me up to speed on quarterly taxes and deductions (fun stuff).
So far I've kept good track of things I've purchased - computer accessories, web hosting, continuing ed - but have not kept track of mileage and a few other things I didn't even know I could deduct, but of which I am now aware.
Keeping up with deductions is going to be a pain if I don't come up with a system. The way I track most things for business is by using spreadsheets and tagging expenses as tax related on Mint.com (and saving physical receipts and email receipts). I'm interested in learning about your methods.
All you awesome freelancers out there: How do you keep track of your deductions, especially mileage on your car?
I've recently transitioned into freelancing full-time as a graphic + web designer. I've got family in the accounting business who are graciously advising me and bringing me up to speed on quarterly taxes and deductions (fun stuff).
So far I've kept good track of things I've purchased - computer accessories, web hosting, continuing ed - but have not kept track of mileage and a few other things I didn't even know I could deduct, but of which I am now aware.
Keeping up with deductions is going to be a pain if I don't come up with a system. The way I track most things for business is by using spreadsheets and tagging expenses as tax related on Mint.com (and saving physical receipts and email receipts). I'm interested in learning about your methods.
All you awesome freelancers out there: How do you keep track of your deductions, especially mileage on your car?
Profile says NC USA.
posted by Brian Puccio at 8:54 AM on October 5, 2010
posted by Brian Puccio at 8:54 AM on October 5, 2010
Best answer: I have an incorporated business (run as an S-corp), but many of the principles are the same. For mileage, I keep a little notebook and jot down the date, destination, and distance anytime I make a trip that can be charged to the business. For all other business-related expenses, I toss the receipt or a note into a file labeled "current month's expenses". Once each month I total all those up by category, record them in QuickBooks, and reimburse my expenses out of the company bank account.
Another method, if you don't keep a separate bank account and set of books for your business, is to create physical files for each of the major categories of business deductions you expect to take at the end of the year. I'm sure your family members can help you identify what those folders should be. Then, anytime you have a business-related expense, just slip a note into the appropriate folder. It will make the end-of-the-year nonsense much easier. Every so often, you can total up the receipts/notes in a particularly active folder, slip the receipts/notes into an envelope and write the total on the envelope.
I realize these are woefully low-tech methods, but they've been reliable for me over the past dozen years or so. Of course, I keep a paper calendar too, so take that into consideration.
posted by DrGail at 9:05 AM on October 5, 2010 [2 favorites]
Another method, if you don't keep a separate bank account and set of books for your business, is to create physical files for each of the major categories of business deductions you expect to take at the end of the year. I'm sure your family members can help you identify what those folders should be. Then, anytime you have a business-related expense, just slip a note into the appropriate folder. It will make the end-of-the-year nonsense much easier. Every so often, you can total up the receipts/notes in a particularly active folder, slip the receipts/notes into an envelope and write the total on the envelope.
I realize these are woefully low-tech methods, but they've been reliable for me over the past dozen years or so. Of course, I keep a paper calendar too, so take that into consideration.
posted by DrGail at 9:05 AM on October 5, 2010 [2 favorites]
Best answer: I keep a notebook in my car for mileage. It just needs to be a habit. Remind yourself that it's going to be saving you money!
For the rest, I go through all my receipts once a month, and basically create a register on excel that includes tax deductible categories. Deductible expenses get check marks in the appropriate box.
Quickbooks probably has snazzy tools for all this, but I'm not there.
posted by freshwater at 9:44 AM on October 5, 2010
For the rest, I go through all my receipts once a month, and basically create a register on excel that includes tax deductible categories. Deductible expenses get check marks in the appropriate box.
Quickbooks probably has snazzy tools for all this, but I'm not there.
posted by freshwater at 9:44 AM on October 5, 2010
Best answer: I help a couple of friends as a bookkeeper and DrGail is spot on. Start by talking to an accountant and see if they have a preference for a certain software. Then get an accounting program such as QuickBooks or Peachtree. Keep your accounts separate and "pay yourself" out of the company money. What I have my friends do is to collect their receipts for a week and then enter then in at the end of the week. Same goes for mileage: Keep a notepad of mileage for business travel and enter it in at the end of the week.
IANYAccountant or bookkeeper. In a former career I was a Subject Matter Expert for QuickBooks Enterprise
posted by Mister Fabulous at 9:49 AM on October 5, 2010
IANYAccountant or bookkeeper. In a former career I was a Subject Matter Expert for QuickBooks Enterprise
posted by Mister Fabulous at 9:49 AM on October 5, 2010
Response by poster: Mister Fabulous, I wasn't really planning on buying software just yet, but maybe that's a must? I use Google Docs for most things like this so I can access my timesheets/spreadsheets easily.
By "pay yourself" do you mean move money from your company bank account to personal? (sorry for being a dunce, but I'm kind of at square 1 right now)
Really appreciate the detailed answers so far!
posted by wundermint at 9:58 AM on October 5, 2010
By "pay yourself" do you mean move money from your company bank account to personal? (sorry for being a dunce, but I'm kind of at square 1 right now)
Really appreciate the detailed answers so far!
posted by wundermint at 9:58 AM on October 5, 2010
Best answer: Well it may not be the best way, and you probably shouldn't do as I do, but, on the plus side, it's easy!
1. Have one bank account and one attached debit card with that account.
2. Go through all the statements from your bank account at the end of the year with different-colored highlighters.
The End.
Honestly I feel like there are lots of "systems" I could use but they're all overblown. It takes me literally a couple hours at the end of the year to go through all my spending and note my expenses, business dinners, purchases, office utility bills, etc. And compare them to my calendar, where I'll note business events.
Car mileage is a little tricky which is why many people do the total mileage and a percentage, whatever that other option is.
posted by RJ Reynolds at 10:08 AM on October 5, 2010 [1 favorite]
1. Have one bank account and one attached debit card with that account.
2. Go through all the statements from your bank account at the end of the year with different-colored highlighters.
The End.
Honestly I feel like there are lots of "systems" I could use but they're all overblown. It takes me literally a couple hours at the end of the year to go through all my spending and note my expenses, business dinners, purchases, office utility bills, etc. And compare them to my calendar, where I'll note business events.
Car mileage is a little tricky which is why many people do the total mileage and a percentage, whatever that other option is.
posted by RJ Reynolds at 10:08 AM on October 5, 2010 [1 favorite]
Best answer: When I was a freelancer, I used FreshBooks to track both billing and expenses. It's free for up to 3 clients, so if you use something else for billing you can just keep track of expenses there. It lets you attach expenses to a client if you're billing them for the expense, and you can have other expenses that are not attached to a client. Then it spits out a neat little report at the end of the year by category. My husband uses it for his freelance stuff now too, which makes my life a whole helluva lot easier since I don't have to chase him down to add up receipts at the end of the year anymore.
posted by bedhead at 10:12 AM on October 5, 2010
posted by bedhead at 10:12 AM on October 5, 2010
Best answer: I like Outright.com (and it's free!). I don't have to deal with mileage, but I keep receipts for everything (including train or subway transportation) and enter it all into Outright. I also save a percentage of all income to prepare for tax time. Keep good notes for yourself from year to year so you can tell when you deducted what in terms of equipment.
posted by peanut_mcgillicuty at 10:29 AM on October 5, 2010
posted by peanut_mcgillicuty at 10:29 AM on October 5, 2010
You don't *need* to buy software, but damn it's nice to have. I know a freelance tattoo artist who runs all of her books through Excel and has no issues with it. FreshBooks might be a great, free alternative. I've personally never used it so I will present no judgement statement. My last piece of advice for all software: always keep backups of your books. One on your computer, one on a flash drive, one off-site. There are few worse hells for a business owner than losing your books.
As for the "pay yourself" it really does mean moving money from company bank account to personal and tracking that in your books. I respectfully disagree with RJ Reynolds' suggestion of keeping one bank account and one debit card. That kind of system leads to shortcuts and the potential for audits. The taxman is one of those areas in life that you want personal separated from business, and two accounts is an easy way to do that.
Last thing: if you are doing a lot of freelance work then get an accountant. Noting your family connections, take time to sit down with your favorite family member who can help you to work it all out. Once you are used to handling the finances it becomes much easier.
posted by Mister Fabulous at 11:44 AM on October 5, 2010
As for the "pay yourself" it really does mean moving money from company bank account to personal and tracking that in your books. I respectfully disagree with RJ Reynolds' suggestion of keeping one bank account and one debit card. That kind of system leads to shortcuts and the potential for audits. The taxman is one of those areas in life that you want personal separated from business, and two accounts is an easy way to do that.
Last thing: if you are doing a lot of freelance work then get an accountant. Noting your family connections, take time to sit down with your favorite family member who can help you to work it all out. Once you are used to handling the finances it becomes much easier.
posted by Mister Fabulous at 11:44 AM on October 5, 2010
Response by poster: I've looked into Freshbooks before and might try that route since it's free. I also like the physical filing system DrGail mentioned as a way to keep track of receipts (which I'm terrible at saving). It sounds like for mileage the best way is to literally write it down in a notebook I keep in my car and then transferring that to a spreadsheet every months or so.
I appreciate everybody's perspectives. Thanks, all!
posted by wundermint at 5:42 PM on October 5, 2010
I appreciate everybody's perspectives. Thanks, all!
posted by wundermint at 5:42 PM on October 5, 2010
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posted by dfriedman at 8:39 AM on October 5, 2010