Running a small business is no easy task. Most of my freelance film/tv/photo production colleagues would agree that it truly is a labor of love.
Tax season is the culmination of all financial facets of your business. Sounds simple enough, right? So why then, has it become such a loathsome project? It shouldn’t be! After experiencing an income tax audit a few years ago, I learned some valuable lessons in how to change the way I think about and process my business records.
As a freelance stylist, I have been running my own business for over 15 years. For most of those years, I worked with an incredible accountant, Neil, who taught me so much. I learned the value and impact of every financial move I make. I love the creativity and collaboration my career allows, but running a successful business requires that the same passion be present with bookkeeping and accounting.
Working with such a passionate accountant encouraged me to change my perspective on the dreaded paperwork and look at it more as a way to analyze different aspects of my business. What kind of supplies am I repeatedly needing? How often do I find myself traveling for work? How does my vehicle best fit my work life? I found myself often thinking about what Neil would say before making major business decisions and soon I was categorizing every business purchase in my head, weighing up how it would impact my bottom line. By the time I was notified by the IRS that I was to be audited, I actually felt ready & confident about every single receipt and every single category. It was still a completely daunting process and took a lot of time and energy away from my day-to-day business, but I was determined to succeed.
It was during this process that I realized the tables had turned and my accountant had taught me well… so well that I felt better in my audit without him. I realized I knew my business better than anyone else, including my accountant. I also knew that I had nothing to hide and processed every aspect of my business to the best of my knowledge. Working with my auditor week after week only increased my confidence and slowly, I began to question HER knowledge. This experience gave me the courage to file my taxes on my own. For the second year in a row, I’m proud to say that I have taken on the task myself and discovered many interesting things in doing so.
Think about ALL purchases you make and what is best for your bottom line. For example, let’s say you’re working from home and are hungry for lunch. You could:
A. Make a sandwich at home
B. Go somewhere for some takeout
C. Take a business associate out for lunch, strengthen a work connection AND deduct the cost of that meal from your gross income. (well 50% anyway)
This can apply to all aspects. Looking to get away for a few days? Perhaps there is a place you wanted to research for an upcoming shoot, or somewhere that would give you inspiration to do your job better. Suddenly your getaway becomes a deductible business trip.
Taking deductions can be satisfying but should be done so with caution! As a business owner, you need to be careful how low you reduce your bottom line. Banks will look at this carefully if you are considering a major purchase like buying a house or taking out an auto loan. Keep your deductions on the up & up . Think of it in terms of an audit. Can you really justify each of your deductions?
Review your profit and loss statements throughout the year. This gives you up-to-the-minute analysis on where your income is coming from, where you are spending your money and how to make changes accordingly.
Consider quarterly tax payments. If you want to reduce the shock (and fees) at the end of the year, you can make quarterly payments based on last year’s income. It’s a personal choice similar to paying your property taxes in one lump sum versus paying a smaller monthly amount but can give peace of mind come tax time. If you choose the lump sum, be sure to ration your earnings throughout the year to avoid getting on an IRS payment plan (which means paying interest!)
Take brain breaks. For a creative person, concentrating for long periods of time on a mundane task like bookkeeping can become overwhelming. Step away often and do something completely different for a few minutes. I enjoy tasks like sweeping or organizing my kit when I start to overload and can come back with a clear head.
Consider each job carefully. Are you taking on a project that pays less than your rate? If so, do you stand to gain something in return? Maybe it’s a favor for a helpful colleague or perhaps connections to a new crew will be forged. If nothing stands to be gained, your time may be better spent finding new clients that will pay your full rate or processing some of those receipts piling up. There is a common knee-jerk reaction among freelancers to take any paying job, but remember, there can be power in saying no. I’ve seen colleagues pigeon-holed into being the go-to person for reduced rate jobs, lessening the chance of being called on for that great-paying gig.
Set aside time each month to reconcile your bank statements. In an audit, the first thing you’ll be asked for are all your bank records. If you reconcile on a monthly basis, any questionable transactions, or unmarked receipts can be rectified while fresh in your memory. If you wait until tax time, it will be far more difficult to remember why you transferred money on June 12th or what that blank receipt for the amount of $142.00 was on August 15th.
Talk with colleagues in a similar business. Even if you may not conduct business in the same way, it is helpful to learn how others keep track of their taxes and accounting. While there are many steadfast rules to accounting, there is also a lot of room to personalize your individual needs. Learning how others process their paperwork can help streamline your own.
Consider your surroundings. As a stylist, it’s perhaps no surprise that I am very affected by my space. If I work in an organized, well-lit room, with a purposeful flow, I find myself much more focused than if I’m surrounded by clutter, paperwork, or stacks of receipts.
Look at collecting and filing your annual taxes as a type of scrapbook for your business. While collecting information from the past year and organizing paperwork, I like to pause to think about certain jobs, clients, and purchases I made throughout the year. Taking the time to reflect on how certain situations led to more work, or how a purchase impacted your business can help keep a productive business. It also adds closure to the year past as we venture forward.
Anne Ross is an LA-based stylist
1. A rule of thumb to encourage freelancers to keep track of expenses - every dollar of deductions is worth about 25 cents in your pocket. That is a pretty good rate of return for your efforts!
2. Most people’s tax year begins at the exact time you say, “Happy New Year”. Keep this in mind if you work a lot at the end of the year. Plan your expenses accordingly so that you aren’t left with a huge tax burden one year and a big loss the next. Also, this is a good time to gather receipts and categorize, while the year is fresh in your mind, unless you have been tracking and doing your accounting monthly. Take advantage of the typically slow start to the year in January and February; a slow season or lull in work can be a perfect time to get this project over with.
3. Financial confidence is extremely powerful. Even if you have a professional do your tax return, you should be fairly familiar with deduction categories and where the numbers that you submitted went on the tax return. Ultimately, it is the taxpayer’s responsibility to insure the return is correct, not the preparers.
4. The IRS uses your NAICS code to check if your income and expense ratio is “usual and customary” for your type of business. For example, a freelance stylist or photographer is more likely to have more mileage expenses than a writer or graphic designer.
5. Speaking of mileage, this can be a great deduction for people with their own or leased car. The IRS allows a 57 ½ cents per mile deduction for business-related mileage. This includes location scouting, supply shopping, travel for research and development etc. My Prius gets 50 mpg, so every $2.00 I spend on a gallon of gas gets me $28.75 in deductions.
6. Our creative lives are always “on”. Make sure you are tapping into your “Research and Development “ expenses like performance tickets (if applicable to your line of work), museum admissions, travel to and from art openings, etc.
7. Be careful about which expenses may have already been deducted or added into your 1099’s. There is no hard and fast rule on this and your per diem rates and agent fees are only deductible if the 1099 has not already had these deducted.
8. Don’t forget that YOU also have the power to issue 1099’s. Studio assistants and other independent contractors that you pay over $600 in a calendar year must be issued a 1099 by January 31st of the following year. These deductions are available to you on line 11 of the Schedule C. Pass the buck and reduce your tax burden.
9. Consider becoming an S-Corp if your self employment taxes are getting too large, or if you are taking on regular employees. Simply becoming a LLC still has you filing a Schedule C. S Corp taxes are truly the job of a professional, who will charge you upwards of $500-1000 just for the corporate return on an annual basis.
10. Don’t forget to deduct the annual cost of tax preparation, bookkeeping, apps, and Turbo Tax.
Remember, each dollar of expenses = more money in your pocket!
Janet Ecklebarger is a Tax Associate based in North Carolina and Illinois.
She has focused her career on freelancers, especially those in the arts and media. She is also a jewelry and costume designer.
She can be contacted at firstname.lastname@example.org and her work can be seen at www.gleandesign.com