“If you can count on any two things in life, it is death and taxes“.
It’s tax season, and we all know what that means: we are in a mad rush to get all our crap together before April 15. It can vary in other countries outside the US, of course!
In ways, being a freelancer and an author at the same time means I have income and expenses coming from different places. My office is at home, so that factors in a few pieces to the puzzle, but it’s not that much of a difference if I rented my office space or have my office space at home.
In this article I am going to share some things that I do that are recommended by my personal tax accountant as well as this free resource sheet by Intuit.
Tip #1: Get a separate account for your business. You can start off with a separate personal account or a business account. Business accounts typically have higher fees, but you can write these off as some of your expenses, so keep this in mind. The bank usually give you the option to upgrade the account later if you choose to go the personal route at first. Ask them plenty of questions to see what would work best for you. This account will have its own checkbook and debit card as well.
Having your business income and expenses separate from the household helps you keep track which is which. It also will help you from poaching the business cash for household expenses or vice versa. Never a good idea.
Also be sure to use the business account for your Paypal and eCommerce and EFT money to be sent to collect the money. If you are still working the day job and if you are married, your spouse’s check should go into the household, unless they have their own business and accounts.
Tip #2: Get a separate credit card for your business. Here again you have the option of just another personal credit card or a “business” credit card. Again, the credit card company probably will charge more interest or have higher fees for a business card, so keep that in mind. However, if you are a person that has a wallet full of credit cards, you may want to choose one you already have for your business card, but before you do that I would pay off any household consumer debt and start off with a clean slate. Keep in mind to only use that designated card for business purchases only and not that dress you want but don’t have money in the household to buy it.
Credit cards have a lot of benefits if used wisely: extra security, rewards that can be used for your business, and protection against someone bleeding the business dry if compromised. Don’t get a credit limit that you don’t think your business can handle or set a spending budget to something you can pay back in 3 months or less, if you carry any debt at all. Credit card interest can be added to your deductions, but don’t go overboard. If you’re in debt, you’re not really making a profit. Be strategic with that debt. Don’t count on “ifcome” (if it comes) or “whencome” (when it comes–usually in regards to a payment threshold before payments will be released). You usually know what will be coming in if you are keeping track of your business.
Tip #3: Have two separate bins for your business and household bills/receipts. This is another way to keep things together but separate them. Only keep the receipts for tax deductible items and but them in the appropriate bin. The same goes for any bills that are tax deductible and credit card statements.
Building a Spreadsheet
I will have several tips listed below in how to operate a spreadsheet. Personally, I have a lot going on, so my examples may be a bit more complicated, but it may be helpful to those who also have a lot going on. For me personally, I am an independent author and I currently operate 5 additional websites (that includes this one) that house my other freelance activities.
I recommend getting some kind of spreadsheet software i.e. Quickbooks, Microsoft Excel, etc. I personally use Excel. If you would like a free option, Open Office has a spreadsheet. I would avoid using Google Docs since it allows online access. Rule of thumb: if you don’t want it hacked, don’t put it online. Always keep a backup on a USB flashdrive or a disk. Should you wish, you can save the spreadsheet on Carbonite or on Dropbox for online storage or any other cloud, but nothing is fail-safe for hackers.
Any office programs or software you use can also be write offs for your business office expenses.
For most of what I will write about next, I will be doing it from Excel. Most programs are similar. Where things differ, you can make the necessary adjustments to your program of choice where needed. There is no way to cover every program that’s out there in one post!
Set Up Your Pages and Columns
Let’s go wide for starters. Microsoft Excel has 3 pages for every workbook. Even that is sufficient for me for everything that I have going on. You can rename the pages from the default names. This is where you can separate “Business” and “Household”. For me personally, I have “Book” (for my author activities), “Household”, and “Soaring Eagle Publications” (the rest of my websites and administrative expenses).
For your columns on each page, bold and highlight the name of the columns that would correspond to that particular write off. Use the link above or ask your tax accountant for more details. I will also list some things that my accountant suggested for each case. Below is not everything! These are just a few to get you started.
Maintenance and Repair
Marketing and Advertising (can also include Social Media management programs)
Product orders (if applicable)
Distribution Fees/renewals (if applicable to your products)
Income (anything specific? Affiliate commissions, royalties, eCommerce, etc)
Business Related Travel
Website Hosting and Domains
State Registration Fees (LLC, Enterprise, Corporation)
Bank Fees/Credit Card Fees
Previous Year’s State Refund
Losses (weather damage, theft that is not covered by insurance)
Doctor Bills, Medicines
Filling in the Spreadsheet
The purpose of this is to separate everything and make it easy to fill in everything as you go or at least weekly, so you aren’t having to scramble to get it together at the last minute. Choose a day that works the best if you are going weekly. Going monthly or longer is not a good idea. If you are not busy yet, getting in a routine is the best way to go. EXPECT to get busy! Practicing in private is the best way to get ready for prime time. If you don’t develop these skills now, then you will fall behind and you will have to pay an expensive CPA. Make the CPA a bonus and not a must!
Note: If you have a website that multiple income transactions almost DAILY, then I would recommend doing this one site monthly to get the tally for the month from your payment account (i.e. Paypal) and put that figure in your income cell for that site. I have a site like this, but this is the only one I do this way. The rest is as I go. I do its expenses as I go.
The Home Business: Since your office is in your home, some of your household expenses can translate to the business as well: utilities, insurance, rent/mortgage, telephone and internet. Basically anything that you would be paying if you had your office space elsewhere, but you have it at home because you either can’t afford another space or by choice. But do be careful and ask your accountant to avoid any red flags, and codes can vary and change.
Multiple Websites: If you have more than one website like I do where you draw income and incur expenses, list them separately by name on your “Business” page. Income is self explanatory. Expenses can be any advertising (Google Adwords, Facebook) for that site, any maintenance or contract work done on it. If you have all of your sites on a single hosting plan, you can add your hosting/maintenance to your administrative or office expenses. You can also list any premium plugin or program purchases that belong to that site. If you have a newsletter that also belongs to that site, then its can also be included here.
Author: I know of a lot of people who are freelancers/business people that are also authors. Being an author has its own set of rules and a business in itself. It’s best to treat it and its activities as a separate entity for the sake of ease whether or not the cash flow goes to and comes from the same place. Chances are you will have a separate website as an author from your business even if you put the book on your business site. Make a column that simply says “Royalties” on your spreadsheet. You’ll see why in a moment. If you have a publisher, then it would be easy. But if you are independent like me, you may have more than one place the royalties will come: Amazon, Google Play, Smashwords, Draft2Digital, Ingramspark, Createspace, or any other publisher you may be working with if you are hybrid. If a publisher ties it all into one check, so why shouldn’t you? Your bank/Paypal statements, check stubs, or sales reports will inform you about all your other info about where the sales happened and where and what title you are selling the best, but for taxes, it’s not that important. Only count what you actually receive and not what is lingering out there if you haven’t hit a threshold (if applicable). That’s what will be reported on your 1099, what is actually paid. You will also be printing off or being mailed your 1099s for your accountant, so no problem there.
Affiliate Commissions: I make one column for these as well. Chances are you will have multiple accounts/programs that contribute to the same stockpile or even multiple tags. Again you will have all the info of where it all came from, but it’s not necessary for the final tally. If applicable, print off your 1099(s) for these.
Adding It All Up
As a reminder, you already should have been recording all your income and expenses for your household and your business throughout the year as-you-go or at least weekly. Starting Jan 1, make a new spreadsheet for that year. Copy and paste your columns from the old one to the new one and name your pages and save. Adjust any time sensitive info (which year’s state refund). You are ready to start the new year!
Add up each column if the program doesn’t automatically keep track. You don’t have to get out the calculator! To add everything up in Excel, go to the cell that you want to use for that column (preferably just be below the longest column on the page to make everything nice and neat) and type in =sum( and highlight every entry in that column and hit enter. Voila! Do this for each column. There is a shortcut to do this to all the columns simultaneously, but there are times something goes wonky or something could go wrong or be wrong. For safety’s sake do one at a time. It’s not really that big of a deal.
Bold and highlight your totals and print off your workbook. Sort your household and business printouts into separate piles (if there is more than one printed sheet). Staple the sheets together and write any information your accountant needs to know for each. If your accountant has a cover sheet or you make one with your totals, put that on the very top. Any kinds of forms that have been mailed to you or printed off (w2, 1099, etc) keep them loose-leaf and put them in the appropriate stack: household, business with the stapled sheets on top and the cover sheet at the very top. Put in a folder and hand it over to the accountant in a nice little package.
Questions? Have any ideas to add? Leave them below!