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.
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 :)
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.
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.
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.
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?