Any first year in business is one of ups and downs, stress and laughter, late nights and early mornings. Mine wasn't an exception, but it was a beautiful and crazy time that I'm going to be reflecting on more in the coming months. Especially now that with the help of our assistant I've been handed back a big juicy portion of my life!
In the past six months my learning curve has levelled off a lot- Freckled Nest has much more of a system for managing our designers and their work, I have a better method for my daily work flow, and we have policies set in place so when new or strange things happen we can use our experience as our guide. But even as I've been growing into my business owner shoes and feel more confident in that role, in the back of my mind there have been two words haunting me: tax time.
{image: VintageScraps}
I'm a planner & organizer by nature, and coming up to the end of my first year of having to track everything on my own was stressful, but…
I'm happy to report back that I survived!
A lot of the readers I've connected with in my post comments or on twitter are creative small business owners or dream about full time freelancer, so I wanted to share some of what I learned.
One disclaimer – I'm not a tax professional and am speaking to my personal (Canadian) experience. If you have a complicated situation and are consulting blogs instead of a tax professional I would imagine that bad things are probably going to happen. Call a pro!
What I Learned at Tax Time as a New Indie Business Owner
Keep a basic balance sheet- with descriptions
I have a simple spreadsheet in Google Docs that took five minutes to put together, and it's been a lifesaver for me. Every time I pay myself (aka. make a Paypal transfer to my bank account) I hop into the spreadsheet and make note of the date, amount & a short description of what kind of work I'm being paid for (eg. types of earning: consulting, design, or handmade). At the end of the month I open up the file where I tuck my receipts and write in the date, amount I spent, store name, and a description of the type of expense (eg. types of expenses: computer, camera, advertising costs, office supplies, my internet bill).
Because I wasn't sure what exactly I could write off, those quick descriptions were a great fast reference for me to hand off to someone who knew what they were doing :)
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To make it easy, keep it separate
When I started working for myself I wasn't sure how I would keep my finances straight, because while I'm organized I kind of loathe bookkeeping. To make things easy for myself I opened a credit card that I call my “business card”, but is really just a credit card in my name that I've decided to only use for work related expenses. Another option is opening a secondary checking account that you dedicate to managing your business. As a visual person, being able to see all of my expenses run through one account statement every month was helpful for keeping myself from spending too much, and it was a great way to check my spreadsheets! If at any time my expenses didn't match my Visa bill, I knew that I'd missed something and could still fix it.
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Note your currency- or make it common
As a Canadian who works almost entirely with American clients, currency was a big concern for me. Half of my online accounts were billed in US funds and half were Canadian. I was paid in US funds, but they were converted to Canadian funds when they were deposited into my bank account. To solve the problem I called a tax pro to ask what I should do, and they told me that as long as I noted the currency in my records they could all be converted for me at the end of the year using an average of that year's exchange rate.
To make my records simpler & more consistent, I started paying all my US bills using my “company credit card” and writing down the actual amount I paid in Canadian on each receipt when I received my statement at the end of the month. I also only recorded my payment amount once it had hit my bank account in Canadian.
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Save a percentage of your income every month
I do not want to be hit with a big bill at the end of the year, but when you work for yourself you don't have tax deductions pulled from your income. Basically I'm guaranteed to owe money every year, and if I don't set aside every month I'm setting myself up to be in over my head. It hasn't been fun & shiny, but every month this year I've set aside a hunk of my income (this year I chose 20%) in a savings account flagged just for paying my taxes so I don't have to sweat!
This is a grown up, no negotiation deal that I've made with myself and it has given me huge peace of mind. A tax pro local to you can tell you what they recommend for you to set aside so you don't have to worry.
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Hand it over to a pro for peace of mind (and the best write offs!)
It's such a strength to know your limitations- and my goodness, has time been one of mine this past year. I knew that without proper energy and expertise I could seriously mess this up- plus I wanted to make sure that all the weird and wonderful tax write offs that come with owning a small business were things I could take advantage of! I knew that I could write off a portion of the square footage of my home, my internet bill, blog advertising I'd paid for that year and things like my skype and cell phone if I took notes, popped my receipts into a file and handed it over to someone who could make them work for me. It cost a couple hundred dollars to get everything done, but it's a relief to know that it was done right and to have a big, neat package of everything I gave them for my records.
What has been your experience at tax time as a freelancer, blogger or creative small business owner?
LAST UPDATED ON: April 17th, 2012
CATEGORY: Content Marketing Strategy Productivity for Entrepreneurs Simple sales system
Wow, this is a great post that I wish I would have read a year ago when I first started my own business. I especially love that advice to set aside 20%! I just started doing that this year and it already feels like such a weight off my shoulders.
I do have one recommendation for you – you should check out Outright.com for you bookkeeping. I started off with Google Docs myself and ever since I switched over to Outright, it’s made everything so much easier and more streamlined. I think you’ll love it.
Great post! I’ve done my own taxes for Yellow Elm twice now, and I had a friend who is an accountant (and very sweet and generous with her time) make me an excel spreadsheet to help keep track of everything. It works like a charm! I enter in all my income and expenses and the spreadsheet is set up to automatically generate totals that match up with the “Schedule C” on the (US) tax return. It has wonderful little drop-down boxes next to each expense I enter so I can choose which official category that expense should go in, and then some fancy formulas to track how much per category and spit out totals for me. The trick is for me to be faithful about entering my receipts, etc. each month so I don’t get behind.
However, I’m sure I’m missing some of those great write-offs, so it would probably be worth handing my spreadsheet over to a professional to help me figure that part out!
I am new to your blog and I’m so glad I found it! Your craft projects are inspiring and so is your savvy DIY business know-how. I aim for such prowess on both ends. Thanks for posting!
THIS is the number one thing that freaks me out the most about freelancing– I’m terrified, and kind of relieved it’s something I didn’t have to worry about this year. Next year though, I’ll be quaking in my boots (though I am also handing it over to a professional).
I’m not a small business owner and I still have a professional do our taxes – it’s the best $100 we spend every year…seriously. Like you said it’s peace of mind – and math seriously stresses me out! So glad you survived! :)
I just finished my first year of freelancer taxes as well. So far I’m in the happy area of being able to deduct expenses but not having to charge taxes to my clients yet.
One thing that helped me was that every time I gave a client an invoice, I printed a 2nd copy for myself and put it in a binder. At the end of the year, it was really easy to see where I had made income and for what.
I don’t organize my expenses often, but I do write notes on the receipt before I throw it into a shoebox.
Then yes, I handed all the spreadsheets and tallys over to my accountant, and whoo! I’m getting a refund!
Oh also – I still have a standard paying job on the side, and I purposely get them to take extra tax off every paycheque – forcing me to save/overpay but without even noticing it. It’s a nice little bridge.
What a great post thank you for sharing! Taxes are one of things that scare me about starting a small handmade business. I have been able to find information but it is mostly information from the US and as I am Canadian like you (I’m your neighbour to the east in Ontario) sometimes the information just doesn’t translate. This are some great concrete steps that are manageable to ensuring that come tax time I am not drowning in stress!
I just started freelancing full time so thanks for this post! I am setting aside between 15 and 20 percent of my freelance income every month in a CD, which earns a higher interest rate than a traditional savings account. That way, the money I set aside for my taxes (which is a regular recurring deduction) earns income!
I wish more American bloggers did practical posts on running an indie business– smashing grand advice {and hopefully it inspires other small business owners in other countries to do the same!}
I’ve decided to do the same thing this year, saving 20% of everything I earn each month to put into a savings account just for taxes. Better safe than sorry!
I also just bought Quickbooks Pro which I REALLY recommend for anyone running their own business, especially those who have to do payroll. It really helps with managing where your money is coming from and going, how to categorize things clearly, calculate costs and profits, basically everything you need for money management for a business.
I’m also going to start using the savings guidelines by Dave Ramsey: https://www.mytotalmoneymakeover.com/ to learn how to better balance my money for business investment, personal budgeting, and savings for the future and emergencies.
Oh money… I’d rather be super crazy insane organized with it than feel like taxes and bills run my life!
xo Moorea
Wow, sounds like you handled this so well! I think the tax side of owning your own business would be so daunting. I am glad you survived your first tax season! Well done!
Kyla – these are great tips, especially the balance sheet and keeping everything separate. This was my first year filing taxes as an indiepreneur, and I survived as well!
Thanks for posting this! I’m in the US and not paying business taxes until next year since I just started this year, but I’m definitely making note of these things!
I’m keeping a spreadsheet with my income and expenses, but not sure I’m doing it the best way possible, would your spreadsheet be something you could share on your blog?
Thanks for sharing. I managed to cobble together my tax return last night thanks to Outright – I have a day job but the Etsy stuff was for real last year, so I had to report it (obviously). I was trying to use spreadsheets for accounting, but thanks to the Outright system i was able to easily track everything by category, etc.
NO, I am NOT being asked to promote it! It just literally saved my butt last night and I couldn’t be more thankful. It’s like MINT for Etsy/Paypal type small businesses.
These tips are great Kyla! Thanks for taking the time, and being Canadian also they are super relevant. I haven’t gotten to the point yet where I need to file business taxes, but I’m hopeful that perhaps in the next couple years it will happen! :)
I only did a tiny amount of freelance work (usually for one or two clients a year) so for the most part, my “business” taxes were pretty easy. Almost all your advice applies to the US taxpayers (I save 30% of my income to pay for Social Security and Medicare and taxes), so this is a great list. I never worked with a professional, just because my taxes weren’t as labor-intensive compared to someone who is an entrepreneur. I also was really bad at keeping records, but again, mine weren’t complicated. I admire people who are small business owners because I have to admit, it scares me to death! Props to you!
Thanks for sharing the amount that you save for Social Security, Medicare & taxes Allison, you’re a gem and that’s really insightful! I felt like I needed to put a little disclaimer up, but like these are fairly basic pieces that could ge helpful to anyone trying to get their paperwork sorted out, who hopes to be gripped by a minimum of terror along the way ;)
Great post, Kyla! I’m paying my quarterly taxes for the first time for my FOUR different forms of freelance income >_< and while I keep lots of spreadsheets I'm crossing my fingers that I haven't missed something big when I go to my CPA.
Oh my goodness- the universe should award you with an Entrepreneurial Purple Heart, in the form of a Starbucks gift card without a limit for all those late nights updating your finances! :)