Not all the money you make is yours to keep.
1099-s. Schedule C. P&L. EIN. I didn’t even know these words existed as W-2 employee.
Now I’m fluent in this tax-related lingo. Well, kind of.
I’ve been working for myself for for three years. Figuring out taxes has been, hands-down, one of the most challenging aspects of it all. Come tax season, I’m juggling a jillion forms and am perpetually worried I’ve overlooked something that will lead to me owing the government oodles of money.
Paying quarterly state and federal taxes are a thing, but that’s the least confusing part. It’s also figuring out the right business structure (sole proprietor? LLC? S Corp?) Finding the right bookkeeping tools and accountant to help you manage it all. Heck, even figuring out exactly which expenses are legitimately tax deductible on how to correctly categorize them on my 1120S is a challenge.
Before I dig in, I want to make crystal-clear that I’m not a tax professional. This is just how I do things. I’m not saying this is how you should also do them. I’m simply offering a peek under the hood of my own business in case you might find it useful.
I’ve never DIY-ed my taxes as a business owner. I tried at first. The free version of TurboTax would not accept my pile of 1099s. So I figured if I was going to have to pay, I might as well pay a human I could ask questions.
All accountants — even ones who work with self-employed folks — do not specialize in the same areas of business. The business expenses you can deduct as a yoga teacher or brick-and-mortar shop owner are different than mine. That’s why I have a digital-savvy accountant who specializes in creative and online businesses. She’s been my go-to gal for going on four years now, and she’s amazing.
I had a different guy when I was working full-time and freelancing on the side. When I began to ask him questions about how my tax situation might change leading up to my move to self employment, he confused me more than clarified things for me. He also told me to stash cash in a shoebox under my bed, and use that to pay my quarterly taxes. Nope.
It was super important for me to find someone who comprehensively understood how businesses like mine work. My accountant gets which types of expenses I accrue and how to categorize them properly. She offers the right recommendations and stays on top of the ever-changing tax law.
She’s also honest and ethical, which is important to me. My accountant does not endorse claiming something as a business expense that was really a personal one. This is another reason why she’s the right accountant for me. I’m not trying to bamboozle the government or get out of paying what I should. I simply want my taxes done right.
At the same time, I also want to ensure I receive every deduction for which I am eligible. For example, I take a home office deduction. I know many self-employed people who don’t. They’re worried it will attract the attention of the IRS for an audit. I legitimately work from my home office, and I have nothing to hide. The IRS is welcome to come check it out. They can even audit me if they like. I’ve got all the receipts and paperwork to back everything up.
The checks I write my accountant are one of my biggest annual business expenses, but she’s worth every penny. There is no doubt in my mind that my taxes are calculated properly. I feel I have nothing to worry about IRS-wise.
How much do you put aside for taxes to make sure you cover your ass? I’ve generally heard a good rule of thumb is 25–30% of your income. When I was a Limited Liability Company, I’d transfer 30% of every check I received into my business savings account, then use that for my quarterly taxes. If I had some left over, great. It was like a bonus.
Though I’m technically still an LLC, I’m now taxed as an S Corporation in Illinois. This introduces a variety of other factors tax-wise and cost-wise. There are a number of mind-numbing articles out there about the pros and cons of all these different business structures. I read a bunch at some point and mostly found them confusing.
Ultimately, I settled on an S Corp because:
- My business revenue had stabilized. In other words, I was bringing in over a certain and relatively stable amount each year.
- It was in my best interest tax-wise. Instead of paying self-employment taxes on every single dollar my business brings in, I pay only pay those taxes on the salary I pay myself. I still have to pay other taxes on the rest of the profits because S Corp are pass-through entities. I pay myself a salary, and any income my business earns on top of that flows through to me on my tax return for the year, but is not subject to self-employment tax.
- I was committed to self-employment for the long haul. I wasn’t planning on returning to full-time employment anytime soon.
But, as my accountant explained to me, S Corps are a more costly and complicated business structure because:
- S Corps have higher set-up costs and more requirements than LLCs do.
- I need to run my own payroll. (I don’t actually do this myself. I use Gusto, which costs me $45/month.)
- It’s more expensive to pay my accountant to calculate my taxes because it involves more complexity and different forms.
- S Corps are generally more of a headache because there’s more to keep track of and more rules to follow to ensure I’m being compliant.
Even with the extra business costs and complexity, it made sense for me to become an S Corp. I paid my accountant to properly incorporate my business as an LLC, then switch to an S Corp when I was ready. I hear it’s pretty easy to do both yourself, but I did not trust myself to do it properly. Incorporating businesses is not my area of expertise.
Electing S Corp status also meant I needed to close my previous business bank account and open a new one because my business structure had changed. Luckily, I had applied for an Employer Identification Number (EIN) when I had become an LLC and was able to continue using the same EIN.
I’m meticulous about tracking my business expenses and keeping them separate from my personal expenses. I have a business checking and a personal checking account. They do not mix. I even keep business and personal debit and credit cards on separate sides of my wallet.
When I first started getting serious about keeping track of expenses, I used Freshbooks for bookkeeping. It wasn’t robust enough and I had to hack my way around to get everything to balance properly. It became even more complicated when I became an S Corp because Freshbooks didn’t properly calculate my payroll taxes and expenses. So every payroll period, I had to make manual edits — and I’d always make at least one mistake somewhere, which would cause a lot of grief come tax season.
I briefly tried Xero and didn’t like it. I switched to GoDaddy Bookeeping at the beginning 2016, which has been better. But it doesn’t offer balance sheets. Come 2018, I plan to switch to Intuit QuickBooks for bookkeeping. Then I hope I’ll never have to switch again, because learning new software and “training” it how to categorize your recurring expenses takes a bit of time.
I also save all my receipts digitally. I’ve heard you only need to do this for receipts over $25, but I save all of mine to keep everything in one place. This includes everything from a latte purchased at a coffee shop where I hunkered down to work (though only 50% of that latte is deductible) to any new equipment or software I use to do work (though equipment like my computer is subject to depreciation).
👆 That stuff in parentheses? It’s the tax-related minutiae that drives me nuts. I’m gathering a better grasp of these rules the longer I’m in business. But I’m still learning. It’s yet another reason why I have that superstar accountant.
Ideally, I’d be categorizing my tax-deductible business expenses at the end of every single month. In reality, I get around to it every few months. I do not wait until the end of the year to do my bookkeeping in one fell swoop. It’s far too overwhelming and makes me miserable.
I briefly considered hiring Bench to do my bookkeeping, but ultimately decided it wasn’t a necessary. I don’t have enough expenses to justify the cost of a bookkeeping service.
It took me a full two years to really feel like I had a handle on my taxes. The first tax season was the roughest. There was a lot of back and forth between my accountant, and I asked many, many questions. I also started out as a sole proprietor, incorporated as an LLC, then switched to S Corp within 12 months. So that made for two years of complicated returns.
Now, I feel I’ve found the right tools, process and system for staying on top of everything tax-related. It took time, and I know I have more to learn and tweak. But since I’m planning on sticking with self-employment for some time, it has been valuable to cultivate these business skills.
Above all, I’ve learned that staying on top of taxes is mostly about taking 100% responsibility for knowing where money in my business is going. No matter how much of a “magician” or “tax whiz” my accountant may be, it’s not her responsibility to keep track of all my receipts and income. That’s on me.
Though Gusto has helped tremendously because all my local, state and federal taxes are filed automatically and paperlessly, there’s plenty else I need to keep an eye out for to ensure my taxes get done right.
If I never received a 1099 from a client or they sent one with the wrong amount? It’s my responsibility to track it down or get it corrected.
If my numbers don’t add up at the end of the year? Also on me to find the error.
I need to stay on top of all the tax deadlines, for which there are many. Mail things to the right places before those deadlines. Send those checks certified so the Illinois Department of Revenue can’t claim it got there late. (I learned this lesson the hard way — twice.)
While I wish I could just dump piles of paperwork on the IRS and have them figure it out, that’s not how it works. I’ve got to stay organized and on top of the money going in and out. If it’s not me, no one else will.
At first, I found this infuriating. But now I take pride knowing where every penny is my business is going, right down to that 50-cent PayPal fee.
Last thing: If you want to try out Gusto for payroll, benefits and HR, shoot me a private note. I’ll send you my referral link. We’d both get $100 Amazon gift cards if you give ’em a shot.
Further Reading about Self Employment Taxes & Deductions
- Self-Employed? How to Budget for Taxes
- Conquer Freelance Taxes & Independent Contractor Tax Deductions by Ben Shanbrom
- List of Deductible Expenses by industry from freelancetaxation.com