2021 Tax Preparation Guide For The Self

Working as a freelancer can be a dream for those who don’t like to punch a time clock. There’s no one to answer to and it’s a schedule where a person can set their own hours. Truly, being a freelancer has a lot of benefits, but it also entails a few responsibilities that you won’t be doing when you are a traditional employee.

The Internal Revenue Service (IRS) considers self-employment as:

  • Business owners (sole proprietors)
  • Independent contractors that work directly with a client

As a freelancer, you are your own boss, thus you are a business owner. If you think you will be exempted from the many deductions a plain employee is charged thus receiving a meager “net” pay, filing your tax as a freelancer is a little bit complicated.  On the lighter side, you can add deductions based on your report to the IRS.

The glitz and glamor of being a business owner goes away when it comes to the yearly tax report. Regardless of whether the taxes are self-prepared or done by an accountant, it is still important to know the deductions a business qualifies for so that proper measures can be taken throughout the year.

Though your main goal of filing your taxes as a freelancer is to reduce your taxable income, and that you have more business expenses to count for compared to a regular employee, you are only allowed by the IRS to report deductions as necessary for your business operations. Anything lavish is a red flag.

Schedule C

To avoid paying a ton to Uncle Sam, most people use a Form 1040 and use a Schedule C. One of the biggest goals of the self-employed is to write off as much as possible. The form starts allowing deductions on Line 8. Here, a write off for advertising is allocated. This will include anything that is done to promote the business. It can be business cards, printed brochures, and even a sponsorship to local community events. Anything used to promote the business should be listed here.

Car Expenses

Car and truck expenses are often a big write-off, and the filer has two basic options. On line 9 of the schedule C, the number of miles driven for business can be entered. The IRS will times those miles by 57.5 cents and in 2021 it’s .54 cents In addition, any money paid for parking fees and other toll fees can be added too. This amount goes on line 9. In section B of form 4562, the other option is to itemize expenses versus mileage. This would be the costs of gas, insurance, repairs, and other car-related costs. It is usually much more advantageous to the bottom line to claim the mileage over actual expenses.

Employees/Contract Labor

As a self-employed business professional, it is often necessary to hire other freelancers to help out. It could be a college student who is helping to do some filing or computer work. Hiring contractors goes line 11 or employees line 26 of the Schedule C and is known as Contract Labor. Any labor that the freelancer paid for but didn’t treat as a regular employee would go on this line. Don’t include fees for accountants and lawyers on this line, those must go on Line 17. Repairs for business equipment would go on Line 21, so it too doesn’t go in this lot. It is reserved for just the people paid to do a job for the business. See the IRS guidelines for more information in Independent Contractors.

Depreciation

If a business has any sort of equipment, then depreciation is going to play a big role in reducing the amount owed. This could be computers, cameras, machinery, and anything else that the company bought to utilize. The IRS allows you to claim the item’s depreciation over five years. There is an exception that will allow a business to write off the total amount up front, or they can split it up over the next five years. Line 13 is pretty self-explanatory.

Insurance

As a freelance business, it is important to have insurance. All sorts of insurance premiums from auto to malpractice can be written off on Line 15. If the company pays for workers’ compensation, storm, accident, and even office insurance, write it off here.

Interest Expense

Any loans that were taken out for the business can be reported on Line 16. If there was any interest paid in the loans, it’s also recorded here. This can be for credit card debt or mortgage interest used if taking the home office deduction. Only a small percentage of mortgage interest will apply to this deduction for home offices.

Professional Services

On Line 17, any legal or professional services can be written off. If there was a lawyer that did some work for the company or an accountant; their fees would be included here. It can be hard sometimes to determine between contract labor and professional services. Typically, anything other than legal or accounting goes under contract labor.

Office Expenses

One of the ways to get some money back is office supplies. Every pen, paper-clip, stamp, and other professional tools can be written off on Line 18. Keep all those recipes from the year, as it can really add up to a great deal. Ink for the printer and printer paper are big expenses. Be sure to tally all that up and include it here.

Professional Equipment/Business Property

If the company leases any gear, like cars or professional equipment, then they can write it off on Line 20a. If a property is being rented for the business, then it can go under 20b, which is for other business property.

Repairs/Maintenance

This is not typically a huge category for the freelancer. Line 21 is for those who pay for equipment to be repaired, or something of that nature. If the computer broke down and an IT professional had to come and fix it, then it would be categorized here. If something needs to be repaired in the home office, it should also go here. This category is not a big deduction area for the self-employed of a small home-based business.

Supplies for Physical Products

If a freelance business produces things to sell, then they can write off the supplies on Line 22. This can be copy paper, leather, or whatever else is needed to make the goods sold. The cost of the inventory shouldn’t go here. Just what had to be purchased within the last calendar year should be included.

Real Estate Taxes/Licenses

Any real estate taxes or federal unemployment taxes can be reported on Line 23. A home office allows a person to put a percentage of the real estate taxes on here too, but a calculation has to be done from Line 30 to see how much to claim.

Travel

Those who travel for the business purposes can enter the costs on Line 24a. Remember to only include meals, gas, mileage, and other expenses that were for actual business and not pleasure parts of the trip. Only reasonable meals count. Anything extravagant will be frowned on from the IRS.

Utilities

If the office is not in the home, then a person can deduct 100 percent of the utilities. A home office goes according to a calculation from Line 30. Phone, gas, Internet service, and electric bills are categorized as utilities. This goes on line 28.

Home Office

The biggest and most complex deduction is often the home office. For this to count on the freelancer taxes, it must be the location where most of the business work is done. The space must be only for business and nothing else. The freelancer must meet clients there regularly, do work there, or use it as a place to store or showcase inventory. The home and office must be measured and the calculations entered online. It is important that you have pictures of the office space and a copy of receipts associated with any claim to ensure that you won’t be triggering red flags to the IRS with your outlandish claims.

The Essence of Professional Help

Assuming the preparation and filing of tax as a freelancer can be quite tedious. It is better to have an accountant look over things so that there is some level of protection in the event of an audit. Especially that the recent COVID-19 pandemic had been an unimaginable adversary.

Understandably, preparing your tax and filing them is one of the constant hurdles in life that seems not to go down in terms of how much you will be taxed. The calculation is only an icing on the cake, but dealing with the ever-changing tax rate yearly is the main challenge.

Obviously all you ever wanted is to lower your self-employment tax. One thing to do is meet all the explanation of your expenses above. Any business-related expenses can reduce your tax but will also reduce your net income. Sounds fair and easy. Yet, if you look at it closely, you need someone more knowledgeable to handle your tax preparation. There are professionals who specialize in 1099 contractors. Through their help, you can lower your tax bill.

Let’s say that your income status doesn’t change drastically every year, but surprises are always there. Like the recent pandemic, not only regular employees lost their jobs, businesses too, and freelancers are no exemptions. Some of them, even working remotely or in the comfort of their home office, lose clients who also shut down their businesses. And if you are one of them, this will have a negative impact on your finances.

For this year, if your net worth amounts to $142,800, it will slash off a 15.3% self-employment tax rate, a little higher than $137,700 in 2020. This rate sums up Social Security and Medicare with 12.4% and 2.9%, respectively. You have to shoulder all of it because you are both responsible for the employer and employee’s portions.

When your financial situation becomes a mess, then it is better to have someone handle your problem. And also being aware that tax laws are constantly changing, that someone, a professional or an accountant, will guide you through.

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4 Critical Bookkeeping Tips

There are many reasons to keep watch on your books. Knowing your income, your outgoings, and having control over your finances helps your business and personal life. When you have a complete handle on all of your finances you will actually feel safer and more comfortable with your life. If you are not a numbers person or the idea of keeping track of your finances terrifies you, then you need to hire a bookkeeper to manage it for you.

Actually Do It The first and most important bookkeeping tip is to actually do it. If you can’t or won’t do it, then you will need to hire someone. Keeping your books is a legal requirement. If you have them you will be spared fines.

You will have more control of your business when you know your finances are well accounted for through bookkeeping. Without a system in place, such as bookkeeping, it is near to impossible whether you are earning or losing, what bills need to be settled, to whom you are indebted or who owes you back. Keeping your own books will lower the fees your accountant charges you to manage your accounts. And if you ever want to sell your business or get financing, you will need to present your books.

Track it All Start by tracking all of your expenses. Doing this may end you up paying for things that you don’t know about or building up fees that you are blissfully unaware of. Tracking your expenses is the first and most important way to keep track of your finances. Start by noting down everything you buy, ever! If you purchase a coffee, keep the receipt and track it. You need to know how much you pay for coffee every week, month, and year. The coffee is just one example; you must track all of your expenses from petrol money to house bills.

Set Aside Money For Taxes Every time you get paid you should put aside the right amount for taxes. You don’t want tax time to come around just to find out you have spent the money. The IRS can incur penalties for you not filing out your tax returns on time, and you could find the situation getting worse. Take note of the tax deadlines on your calendar to keep you updated on your tax dues. It is smarter if you set aside money throughout the year so you are always prepared.

Use A System to track it A system can be as simple as a diary or file that contains all your incomings, outgoings, taxes, and all other finances. You can also get a system like Simplex to help track your books and accounts in a simple fashion. There are other systems like Everite and Collins that you can use or outsource to manage your accounts and keep your books. There is a wide variety of computerized systems, and if you are running a small to large business you will want to consider using one of these systems. You can use Sage, MYOB, or search in Google for bookkeeping systems. There are many bookkeeping apps to choose from. The bottom line is that you must use a system. You can use a notebook or filing system to keep track of everything, and organize it so that you can see incomings and outgoings.

Simple Rules For Keeping Books When you are writing in your files, make sure to use a pen instead of a pencil. If the IRS or the tax office should inspect you, they like to see that you are using a pen. Figures written with a pencil may appear suspicious because these can easily be erased. Never use correction fluid as the checker of your book may think that the data are doubtful.

Keep your books updated. If you wait around for months before organizing and managing your books then it will get too overwhelming, and you will end up messing up or leaving it too long. Make the updates daily or at the very least, weekly. This will save you from piled up work and help you to have these books manageable at all times. When you are paid, or you spend or any financial transaction takes place, it should be recorded in your books. If money is going in or out of your pocket then it needs to be in the book. If you use online banking then print out your bank statements whenever you get them. If you get bank statements in the post then keep them all filed so you have all the information needed whenever you are organizing or sorting out your books.  

More About Your Bank Statements Every month you should go through all your bank statements and confirm that they fit with the details in your books. Anything that you have missed or that isn’t covered you need to track it properly in your books. Go through each entry, and as you match the entries from your books and your statements you should tick them off. This is an easy way to make sure everything is kept up to date. When you go through the statements make sure you notice any standing orders, interests or charges, and confirm that they are all in your books properly documented. When you have gone through everything, calculate the final balance and write it down so you have it recorded for that month. Compile all your total sales figures and expenses for every month, and when you have all the data you will be able to properly calculate your profit and loss. You should record all of this in a spreadsheet or notebook at the very least. There are many softwares and services that you can use to make this much easier.

A Friendly Reminder If this sounds a little overwhelming, you know exactly why there are bookkeepers. Hiring a professional, someone who knows how to do bookkeeping and master it especially when dealing with numbers and figures, will give you an ample peace of mind. Bookkeepers can manage several accounts so you won’t need someone full time, and you can usually get the service of someone for a fairly low fee to manage everything for you. Regardless of whether you hire a bookkeeper, you will still need to track your income and expenses by saving receipts, invoices, bank statements, and any other financial transactions.

Claim Business Expenses This is extremely important if you are not doing it already. You can claim for any cost that is made exclusively for the business. You should save all of your receipts, especially those for the business because when you add up those costs you can claim for these. If you have stationary that you use in the office you can claim for that. If you take a trip to the bank in order to have a business meeting then you can claim for the cost of petrol.  If you have an office at home you can claim a portion back from your electricity and maintenance bills including telephone and Internet. If you are having trouble deciding whether something is exclusively being used for the business then you can talk to an accountant.

Get some further training The HMRC gives away some free training including some workshops, which you can go on to learn more about this. You can go to a free workshop to learn about setting up a company, managing your VAT, running a payroll, and many other financial lessons. It’s important to take an interest in learning how to manage your finances because if you can get on top of it your business will grow and your finances will improve. You will also gain incredible peace of mind knowing that you are on top of everything yourself and you don’t need to hire someone, although you still can if you want.

Conclusion There is a lot to think about when dealing with your taxes, books, and finances. This is why you may want to consider hiring an accountant or bookkeeper to start the process of managing your books and keep your finances in check. It’s a legal requirement, and it gives you an opportunity to have complete control over your financial life. You can start anytime you want but the best time is now.

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