Tax savings for the self-employed
Collective is tax deductible and starts paying for itself in less than 2 months.
From formation to taxes, you get all support you need for one affordable monthly price.
It’s tax season, and you know what that means: doomsday is upon us! The earth is cracking, fire rains down from the sky, and you actually have to finish your bookkeeping.
Okay, maybe I’m exaggerating. But most self-employed people do feel like tax season is the most stressful time of year, especially when it comes to figuring out their tax prep. Because this is definitely not something you learn in school.
Which is why we’re breaking down everything you need to do to prepare for your taxes. Whether you file your taxes yourself or hire a tax person, follow these steps and you’ll be cruising through tax season without a single piece of brimstone getting in your way.
You know what sucks? Sending everything off to your tax person on April 14th and getting an email the next day that you’re missing something—and not knowing where that something is! And then spending all morning searching for that something while silently weeping that tax season is never going to end.
Avoid all this drama by setting up a tax organization system in January. The system is really simple: make a place for all of your tax documents to go.
Tax documents include business and personal year-end forms and statements like:
- Form 1099-NEC (if you’re a sole proprietor or single-member LLC)
- Form 1099-K (if you process more than $20,000 in credit cards and more than 200 transactions)
- Form K-1 (if you’re a partnership or S Corp)
- W-2 (if you also have employee income)
- Health care tax forms like Form 8962 or Form 1095A
- Student loan interest statement (Form 1098-E)
- Mortgage interest statement (Form 1098)
- Anything else tax-related that you receive
Usually, freelancers receive tax paperwork through the mail or digitally, so be sure you have a place for both types of documents.
How to organize tax documents you receive by mail
Keep a folder wherever you put your mail, and keep all your tax documents inside of it.
Okay, cool. So when I get tax mail, I just throw it into that folder, right?
Noooooooo! When you get tax mail, open it and review it. Look for errors, and make sure the numbers on the document make sense.
Mistakes happen, especially with form 1099-NEC. If there’s a mistake, you’ll need to contact the business that issued the 1099 and ask for a correction, which can take time.
After you review the document, put it inside your tax folder.
How to organize digital tax documents
Make a folder on your desktop called 20XX Tax Documents.
Every time you receive an email notifying you that a document is available, go to the website, download it, and save it to your folder.
Then open what you downloaded and review the numbers for errors.
Finish your bookkeeping
Now that you’ve conquered the paper clutter, it’s time to whip your books into shape.
Here’s how to close out your books for the previous year:
- Record and categorize all of your business transactions
Basically, you need to make sure that your financial data is complete. That means all your business income and expenses should be accounted for. If you’ve been lagging on your bookkeeping, it’s time to catch up.
The reason most freelancers don’t file their taxes on time is that their bookkeeping isn’t done. If you are, let’s say, a year behind, start the catch-up work early. Like January early. Then, commit to doing a few hours of bookkeeping a week until you’re done. It’s way easier than trying to do an entire year in one weekend—that’s meltdown territory, trust me.
- Record anything you paid for using your personal account
In a perfect world, every business expense is paid through your business bank account with kittens and rainbows. But in reality, mistakes happen, cards go missing, the cat barfed on your pillow, and you used your personal card for business expenses.
That’s okay! Just make sure that you record these expenses, ideally in your bookkeeping program, so you can write them off. Remember, tax deductions help lower your tax liability, so you don’t want any write-offs slipping through the cracks.
- Address lingering questions and issues
Deal with all the stuff you haven’t wanted to deal with. Don’t know how to categorize an expense? Ask your tax person. Not sure what to do about an awkward refund? Google it. Got a mystery deposit you can’t place? Figure it out and then hit the slots in Reno.
Basically, it’s time to take care of everything you’ve been putting off for later because later is now and tax season is nigh.
- Reconcile your accounts
Ah, the dreaded “R” word. Perhaps the most important thing you can do for your bookkeeping, and the task you’re least likely to do.
Reconciliation ensures that the information in your bookkeeping program matches your bank statements. It’s kind of like balancing a checkbook (vintage, I know).
Every month, you look at the transactions on your statement and look at the transactions in your bookkeeping program, and check off the ones that match. The ending monthly balance in your bookkeeping program should match the ending balance on your statement.
You probably read that and thought, “That’s a lot of words I don’t care about.” But, here’s the thing. Reconciliation confirms that the numbers you report on your taxes are correct. If there are any bookkeeping mistakes, you’ll catch them when you reconcile.
What happens if you don’t reconcile? Well, if there’s an error and you overreport your income, you pay more taxes than necessary. If you under-report your income and the IRS finds out, you’ll owe back taxes and penalties.
The same goes for expenses. If you under-report your expenses, you pay more taxes than you need to. Overreport and get caught, you pay extra taxes and those pesky penalties.
The bottom line is that you should reconcile all your business checking, savings, and credit card accounts through the end of the year.
Review your numbers
Now that your bookkeeping is done, it’s time to triple-check that the numbers are correct.
If you haven’t noticed, the IRS likes truth-telling and accuracy. So you want to be absolutely sure that your numbers and categorizations are correct.
Do a broad overview
If you’re using a bookkeeping program, run a Profit and Loss Standard report and look at your general income and expense categories. Does everything make sense and look right?
For example, if you pay $500 per month for a co-working space and your report shows that you spent $3,000 on rent, then clearly something is up. From there, you’d investigate what other expenses are categorized as rent and if they need to be reclassified as something else.
Next, run a Profit and Loss Detail report, or just scroll through all your transactions. Scan each one and make sure that the category is correct.
Keep in mind that this is a scan, not line by line research for your dissertation. It sounds tedious, but it should only take you about 30 minutes.
Log business mileage
Now it’s time to rack up the tax savings by taking special deductions that are available for freelancers, starting with business mileage.
Here’s how the mileage deduction works: Every year, the IRS sets the standard mileage rate. For the 20202 tax year, the rate is 57.5 cents per mile. You multiply your annual business mileage by the mileage rate, and that’s your tax deduction.
So, if you drove 2,000 business miles in 2020, you get to write off $1,150 just for driving!
What counts as business mileage? Anywhere you drive to or from for business, that isn’t your principal place of business. Your principal place of business is your primary office location. If you rent an offsite office, you can’t write off the miles that you drive from your home to that location and back. But everything else is fair game!
Examples of business driving are:
- Meeting clients
- Meeting contractors or professionals that you work with
- Running errands (like buying office supplies, going to the post office, going to the bank)
- Trips to the airport for business travel
What if you work from home? Then lucky you because all business-related driving is deductible!
How to track business mileage
Taking advantage of the mileage deduction is super easy. Just make a mileage log for the year and write down all your business drives.
For each trip, your mileage log should include the:
- Starting point
- Ending point
- Purpose of the drive
- Total miles you drove
When prepping for your taxes, make sure that your mileage log is complete and accurate.
If you haven’t tracked your mileage during the year, you can retroactively make a mileage log. Here’s how:
- Review your calendar and look for business meetings. You can also review your financial transactions and look for times that you drove (like going to the office supply store).
- Go to Google Maps and enter your starting and ending location. The directions will show you the total one-way miles. If you need the round trip miles, double them.
- Enter the trip details into your mileage log.
- When your mileage log is complete, total your miles.
Record home office expenses
If you have a qualifying home office, taking the home office deduction can seriously lower your tax liability.
The way it works is that you write off a percentage of your household expenses, like:
- Mortgage interest and property taxes
- Homeowner association dues
- Homeowner’s or renter’s insurance
- Security system
- Repairs and cleaning
To determine the deductible percentage, divide your home’s total square footage by the square footage of your home office. That’s the percentage of your home that you use for business, and the percentage of your household expenses you can deduct.
For example, if your total monthly rent is $3,000 and your home office takes up 20% of your home, you can write off $7,200 of your rent. Yeah, that’s a lot.
But with great tax savings comes great recordkeeping responsibility. When you prep for your taxes, you need to record and calculate all of your household expenses for the year. This means sorting through old utility bills, insurance statements, and rental documents to make sure your numbers are accurate.
Thanks to Collective, I don’t have to worry about bookkeeping, taxes and other government related tasks and can focus a 100% on my work. If you’re self-employed and need help with legal, tax, bookkeeping and ongoing support, all-in-one place, you’ll love Collective!
Arjun Dev Arora
Strategy, Venture, TechnologyGet started with Collective →
Calculate home internet and cell phone deduction
If you haven’t noticed, I’m all about squeezing every last tax deduction out of you. Because why pay more in taxes than you need to? And that brings us to writing off your home internet and personal cell phone.
Here’s the cool thing about writing off your cell phone and home internet: this deduction operates independently from the home office deduction. You don’t need to have a qualifying home office to write either of them off. And you don’t have to write off the same percentage as your home office.
Instead, you write off your cell phone and home internet based on how much you use it for business. So if you use your internet half the time for business, you get to deduct 50% of your home internet.
For example, if you pay $1,500 per year for your cell phone service and use it 50% for business, your tax deduction will be $750.
The key is being honest about how much you *really* use personally. Binge-watching Netflix, playing Fortnite until 2 a.m., and YouTubing mini-pig dance videos all count as personal internet time.
As a general rule, writing off 100% of your cell phone or home internet is a big no-no. It’s pretty unbelievable that you never use either of these things personally—and remember, the IRS doesn’t like lying.
While preparing for your taxes, first decide the deductible percentage for your cell phone and home internet. Then, total the annual cost of each one and multiply the total by your deductible percentage. That’s your tax deduction.
Prepare your documents for your tax person
The very last step is to compile all of your materials for your tax person (or yourself, if you plan to file taxes yourself).
The easiest way to do this is to save everything to the digital tax file that you made in step one. Then, you can just email the whole folder to your tax person.
Here’s what a tax preparer typically needs:
- Copies of any tax documents you receive
- A Profit and Loss Standard report for your business
- A Profit and Loss Detail report for your business (optional)
- Total business miles for the year
- Total home office expenses for the year
- Total deductible portion of your home internet and cell phone
Every preparer’s process is different, so be sure to check in with your tax person early about anything else they’ll need from you.
And that’s it! Now you have an easy and organized routine to follow every year when it’s time to get ready for your taxes. No drama, no tears; just sweet, sweet tax filing glory.
Andi Smiles, small business financial consultant and coach, teaches rad business owners to take control of their finances so they can step into their personal power.
She’s helped hundreds of self-employed folx organize and understand their business finances, while also uncovering their emotional relationship with money. Andi’s core belief is that when business owners are engaged with their finances, their personal awareness around money deepens, creating more sustainable and authentic businesses. She loves helping business owners connect with and feel good about their finances- no matter how many dollars are in their bank account.