Like many of you fellow freelance writers and other self-employed folks, I’ll be doing my taxes soon. Since productivity is an important focus here, I’ll share how I do my taxes. You can chime in below with comments and we can all learn from each other.
(Note: see this recent post for other important advice: The 8 Top Ways to Legally Lower Your 2013 Freelance Writer Tax Bill.)
Here are my tools and methods…
I Use TurboTax
This is the fourth year in a row I’ve used Turbotax (the downloadable version). You can also do your taxes online at Turbotax’s website.
I use the most comprehensive version of Turbotax because my income derives primarily from my freelance writing and information product sales, and also from various investments. I also do some buying and selling of stocks and mutual funds, and this version can go to major financial institutions and automatically download financial data and enter it into the appropriate forms.
Turbotax also makes doing my Oregon state taxes a breeze, and the e-file is a no-brainer.
Note that there are less expensive versions of Turbotax, and there are also other forms of tax-preparation software, some of them free if your income falls below a certain level.
I Take Advantage of Paypal Data
I use Paypal for all sales of my Find Your Freelance Writing Niches course and my e-book Writing College Textbook Supplements, 2e. I also use Paypal for many of the goods and services I use for my business. Paypal has summaries online of all my income and all my purchases. I download the data and pop the proper amounts into my Schedule C.
I Take Advantage of Amazon.com Data
I purchase most books and many other products from Amazon, and many are deductible. (I take advantage of free 2-day shipping with Amazon Prime
.) I can easily see which items I’ve purchased, and again, it’s a snap to get the right figures for Schedule C.
I Take Advantage of Annual Credit Card Summaries
I use a business-account credit card for all purchases. My company gives me annual itemized summary of every charge grouped by category, so I’m all set to figure out which amounts are tax deductions.
I Use 3 Envelopes…
Envelope 1 has all receipts that are likely tax deductions. If I don’t have a receipt, I write the pertinent info on a 3×5 card.
Envelope 2 has all my tax-related forms, including check stubs and tax forms like estimated-tax forms and 1099 forms that I give to independent contractors who work for me. I also write info on the outside of the envelope, including how much I pay in estimated tax each quarter and any money I applied from the previous year to this year’s taxes, and also money I’ve contributed for the tax year to retirement accounts.
Envelope 3 has all receipts that are not tax deductions that I still want to keep.
I Maximize my IRA Contributions
I put in the max amount to my traditional IRA at the beginning of each tax year, typically in early January. I caught a bit of break (so far!) when I put most of my 2014 contribution in a couple of weeks ago at the bottom of the recent market dip.
I put money into my SEP-IRA a couple of times a year, when I have a good idea of my income so far. I’m careful to put in substantially less than I’ll likely be entitled to, because there are penalties for adding too much in one year. Once my Schedule C is final I add the last amount to get to my max.
What I Don’t Do
I don’t use Quicken or any other accounting software. Why?
First, my methods work for me and feel efficient. It only takes me about an hour or so to use pen, paper, and calculator to fill out my Schedule C.
Second, I don’t want to pay for software or invest the time to learn how to use it. By the time I enter data into Quicken, or even an excel spreadsheet, I can write it on a piece of paper in the appropriate Schedule C category, and it only takes a few minutes to add up all the numbers on the calculator. (And for brain exercise, I double-check by doing the math in my head.)
Your Methods and Advice?
As a freelancer or businessperson, how do you do your taxes? What do you think is most efficient? Any suggestions for me to improve?
Thanks John: I do almost the same thing you do – manual recordkeeping with TurboTax Home and Business. I’ve thought about learning Quicken, since so many people do everything via computer, but I keep putting it off…just not motivated to learn a new software and input everything from scratch.
Would like your opinion or opinion of others: debating between online and download versions of TurboTax. Why did you choose download? (I don’t have a state tax, so wouldn’t need the state filing and could save money with the online version…but I’m wondering if there’s a big downside…like no access to the program after 3 years and how important that might be.
We agree on not using Quicken: takes time to learn and you still have to input the data.
I download Turbotax because the one year I used Turbotax online I had a lot of diffulties with the site. At times I couldn’t access it, and a couple of times it didn’t save my data.
I know one person who’s had no problems with online Turbotax over the last couple of years, though, so maybe the problems have been fixed.
I use an Excel spreadsheet to record my income and expenses throughout the year and save my receipts in OneNote. I have a column in my expense worksheet for the Schedule C category so I can just sort by category and enter the total on my Schedule C. I assign receipt numbers to each receipt when I save it and enter that on the spreadsheet as well. That way, if I get audited and the IRS asks for a specific receipt, I can find it easily.
Bethanny, that sounds like a very smart way to do it.
If I ever get audited, I’ll be able to show the specific receipts, but it won’t be as efficient as your method.
And let’s hope we never get audited!
Thanks for sharing because this is a topic I’ve been interested in. Ive actually never done my taxes, as my father loves doing this kind of thing(dont ask me why!) It seems that when you’re not getting a regular check from a company, taxes become much more difficult to understand.
You’ve at least given me some stepping stones to understanding taxes, when my blog begins to generate income, that is.
Shawn, just be sure you keep track of all the expenses related to your writing.
I like that 3×5 card idea for missing receipts so you have something in hand as a reminder for that expense. I’m a big fan of FreshBooks though–I use my paid sub for all my invoices and to log all expenses. Any emailed receipts get saved in an email folder marked “Biz expenses 2014” and paper receipts go into an actual folder with the same name with the most recent ones on top for quick reference. I’m able to print an expense report for the whole year come tax time. This keeps it pretty streamlined for me for now.
One thing to note for paper receipts: sometimes the ink disappears so it’s good to log it somewhere else digitally.
Margie, I’ve heard very good things about Freshbooks.
I also use a specific folder for emailed receipts, along with another folder for Paypal income for my information products.
gave up on quicken and now use You Need a Budget – much easier and cheaper… then I take it all to my tax guy… worth every penny since I don’t really add and subtract reliably and reading govt. instructions makes my brain explode.
A qualified tax professional is an excellent option. I’ve just always done my own taxes, plus I’m pretty good at math.
My approach is similar to Bethanny’s. I have an Excel spreadsheet that ties into my invoicing and my expenses. I can run totals by vendor, by type of expense, by month – what have you. It makes it easy to spot discrepancies.
For example, this year I received a 1099 from a client and saw immediately that the total was wrong. I contacted them and received a corrected copy. (Their original overstated the amount paid).
I use H&R Block online. Not sure how I got started there, but it’s nice that when I do it each year, their software automatically pulls in the prior year. My goal is to outsource this to a “tax guy,” like Anne. 🙂
I always double-check my 1099s versus the payments I received. (Everyone should do that!)
Glad H&R Block pulls in your old return. Turbotax does that also. I’m very grateful for that because it picks up data that’s continued from year to year.
I use excel for all the reports and expenses. I am not an expert in excel, however I am learning the basic things 🙂
Excel can be very useful for organizing tax info. I use it to organize my work contacts and income.
I love your three envelope idea, John. I’ll start that today for 2014.
I started using TaxAct a few years back when my (then) computer was so old it was no longer compatible with other income tax software. But I skip the free version (adequate for most, but I want to be sure I don’t miss anything) and go for the premium one. It walks me through the process, tells me where everything needs to go and does the math for me. The hardest part is double checked that I haven’t missed any receipts or expenses.
I’m open to trying other programs, but this one saves and imports any pertinent info from previous years…and I’m lazy.
Paula, if it’s working for you, and it’s accurate, there’s no need to change.
My system might be accurate, but it could certainly be better organized!
Thanks to your tip I now have my 2014 envelopes marked and stashed in the same drawer I used to just toss the receipts in!
Paula, I also keep the three envelopes in permanent storage, just in case I ever get audited.
This was highly informative. I do some freelance work on top of my day job and those 1099s are really pesky. I’ve been learning on keeping a record of my expenses and now I have more tips. I love the envelope idea so thank you for that. Is turbo tax reliable? I’ve been doing my taxes on my own and it would be nice to have some software help.