Tax time can be a challenging time of year, especially for those of us with more complicated tax situations. Independent contractors tend to land on the more complex side of the spectrum, given the fact that they're responsible for running the administrative portion of their business in addition to actually servicing their clients. Oftentimes, they're rock stars when it comes to their core business, but the administrative tasks can sometimes pile up to the point where it starts to seem insurmountable.
We've got a few tips and tools to help with the administrative/tax side of things that might just be the bit of info you need to start getting things under control.
- Keep track of your expenses on a regular basis. This may be the most obvious item on our list, but we often see that people will wait until the last minute when they've got a mountain of transactions to sort through and categorize. The task can take hours, if not days, when everything is in a jumble. So, we recommend setting aside a about 15-30 minutes per week so that your transactions don't pile up on you. Online apps and tools are a great start. They'll try to sort through your transactions and categorize them in real time, but at times they'll miscategorize expenses and you'll need to step in and recategorize those errant transactions. That's where we recommend investing those 15-30 minutes. This will save you the 8 or 10 hours that you'll struggle to find at year-end with tax-time bearing down on you.
Tools: Freshbooks, Xero, Shoeboxed, Quickbooks
- Related to our first tip, opening a separate bank account for your business is by far the single biggest step you can take towards keeping your expenses tracked accurately. Having a separate account will allow you to keep your personal expenses from getting mixed up with your business expenses; you'll never have to wonder if that meal was a client dinner or a night out with your significant other.
- Use an ongoing bookkeeper. If all else fails, we recommend that you hire an online bookkeeping service. Companies like Bench or Bookkeeping Express will automatically categorize your transactions for you on a regular basis and ask you about transactions that they couldn't categorize. The nice thing about these services is that they'll prompt you to invest those 15-30 minutes we talked about in our first tip. You'll also have a great source of information relating to how your business is doing on a regular basis (information is power). Depending on the size of your business, these services will charge as little as $95/month.
Tools: Bench, Bookkeeping Express, Botkeeper
- Make quarterly estimated payments. If you're not familiar with quarterly estimated payments, they're the equivalent of taxes withheld from regular, W-2 employees. This is your way of avoiding having to make a huge tax payment at year-end. You'll also avoid underpayment penalties and interest that can start to add up. You should make estimated payments if you expect to pay more than $1,000 in taxes and have not had any taxes withheld from an employer. Services such as Taxfyle can calculate your estimated taxes and provide you with payment vouchers that can be used to make your payment to the US Treasury.
Tools: Taxfyle, IRS 1040-ES
- Tracking your mileage can help you understand the true cost of servicing your clients while simultaneously reducing your tax liability. Sure, it might be a pain to track your mileage, but there are excellent tools that help make it simple and provide insightful reports that will stand up against IRS scrutiny. Tools: MileIQ
- Measuring your home office may not seem like a logical tip for helping you with your taxes, but it is. The IRS allows you to deduct a portion of your mortgage/rent and utility bills if you have a space in your home that you use exclusively as a home office. In order to calculate the tax break, you would take the square footage of your home office and divide it by the total square footage of your home; you would then take the resultant percentage and multiply that by the total expenses related to your mortgage/rent and utility bills. It's an involved calculation, since you have to break out your measuring tape, but it's relatively easy to find the square footage of your home on your tax appraiser's website (so you only have to measure your home office).
Tools (Literally): Measuring Tape, Your County's Tax Appraiser's Website