Freelance Taxes #1: The Basics of Getting Started and Preparing Your Taxes

Freelance Taxes #1: The Basics of Getting Started and Preparing Your Taxes

Sometimes the hardest part about doing your taxes is summoning the will to start. If you're like me, you'll do anything else on your long list of "To-Do's" before you're willing to do taxes. I don't blame you.

From our ongoing discussion of How to Do Your Taxes as a Freelance Filmmaker:

Taxes are cumbersome, complicated, and there’s a lot of money to be made or lost. I always feel a little worried when actually filing that I forgot some deduction or left out some info that’ll cost me an extra $100. After all, $100 is several meals (or at least a bill or two).

But alas, you have to do taxes at some point. You’re bound by the law to do them and the government is pretty serious about their deadlines.

So today’s post is all about that initial push and getting started with your taxes: gathering the appropriate forms, evaluating your options for filing, and some tips on prepping for the actual filing.

Ready to get started? Yeah, me neither. But here we go anyway…

What You’ll Need to File Your Taxes

I find the process of filing your taxes goes much faster if you get ahold of everything you need before you sit down to do them. If you don’t, you’ll get up every minute or so to go find a form, search for a receipt, or print off some paperwork. Not only does this take longer, but you risk losing your motivation. So here’s what you should gather ahead of time so the process goes smoothly:

Your (and Your Dependents’) Basic Information

Including: Social Security Number, Birthday, Full Name, Address

If you don’t have this stuff memorized, it’s amazing that you’re doing your own taxes at all!

But I list it here because you may be doing taxes for others in your family (such as a wife, husband, or kids) and you’re going to need their info. As a loving husband/wife/father/mother, you probably already know it, but just in case, let this be your friendly reminder!

Common Forms

Including: W-2, 1099, 1099-Misc, 1040, Schedule A, Schedule C

There are two types of forms you will encounter when doing taxes: those filled out by an employer and mailed to you, and those needing to be filled out by yourself.

You’re probably already familiar with many of these forms even if you don’t know the numbers associated with them. For instance, the W-2 form is what is mailed to you from an employer. That form’s purpose is to give you the exact amount of money you were paid (or at least that the production is reporting they paid you to the IRS).

Another popular form is the 1099 which serves a similar purpose to the W2.

Other forms that you may encounter have to do with itemized deductions, business expenses, and dividend or stock reporting.

For the purposes of filing, you’ll want to collect anything and everything mailed to you that has tax implications. This is important because if you’re receiving something in the mail about it, the IRS is receiving something about it too and you don’t want to file your taxes with reported forms missing.

Paperwork for Expenditures and Deductions

Including: Bank statements, credit card statements, receipts, invoices, PayPal account reports

The majority of your time spent filing will be on itemized deductions and, depending on the amount of paperwork you related to those deductions, it can be a simple process or a complicated one.

Collect everything you have that reports what you spent money on throughout the year — receipts, bank statements, credit card expenditures, financial analysis, invoices, whatever.

This allows you to go through these papers one-by-one and determine whether expenditures will qualify as deductions. Sometimes you spend money on things that, at the time, you don’t realize are deductions. By having all the paperwork in front of you, you find little surprises — “Oh yeah, I forgot I spent $50 on that shoot to get more gaffer’s tape.”

Even if you didn’t save anything throughout the year, all hope is not lost. You can still pull those expenses from the depths of time if you’re savvy enough. For instance, my credit card company provides an end-of-year report that breaks down literally every single purchase I made throughout the year. On the sidebar, it provides checkboxes to mark which purchases qualify for deductions. Do not miss out on tools like this!

Three Ways to File Your Taxes

When it comes time to file your taxes, you have three options. These three options range in terms of difficulty, cost, and quality. None of them are the “wrong” option, but each has distinct advantages and disadvantages.

Let’s take a look at each one closer.

1. Tax Software

Difficulty: Moderate

By far the most popular option, tax software like TurboTax or H&R Block Online has grown substantially over the past few years with the ability to electronically submit your taxes to the IRS.

This is how I do my taxes. I like it because I can do them from home without the burden of navigating all the forms myself. The software, while complicated at times, simplifies the tax process in the same way a financial planner might without the hassle of appointments and meetings.

The downside is you’re the gatekeeper. While the software will point out discrepancies and do all the calculations, there is always the chance you’re deducting something you can’t deduct or the software will file a form that is inappropriate for your situation. Some programs offer a human review of your submission before it goes to the IRS, but this feature usually costs extra and, let’s be honest, you aren’t there to watch that review take place.

In terms of price, tax software is fairly affordable. To me, it will cost about $100 to file after processing fees. That’s totally worth it in my mind because I have so many different jobs to report and so many deductions to handle. I will save more than $100 by using the software than if I were to try to do it on my own. It basically pays itself off (and that $100 is deductible, by the way).

As far as quality, the software is as good or as bad as the information you give it. In that sense, it is nowhere near as quality as using a CPA or financial advisor. Still, if you know what you are doing (and you will by the time this series is over!) you can have high quality results.

2. Tax Professional

Difficulty:  Easy
 Affordable to Expensive
Quality: Very Good

Hiring a CPA (Certified Public Accountant), financial planner, tax lawyer, or accountant is always a solid way to get your taxes done. If you have zero confidence you’ll be able to do your taxes competently, this is money well spent to keep your peace of mind.

The main trade-off in hiring a professional is the cost. While you may be able to find some afforadable firms to do your taxes, to get the type of one-on-one service you would imagine you deserve from a professional, it’s going to cost a pretty-penny.

But if you are rolling in the dough and stand to lose a lot or gain a lot depending on how your finances are processed, then you could easily make back the money you spend on a professional.

The biggest advantage is that you don’t have to do much work. You may have to answer some questions about what receipt meant what or common questions about your financial life in general, but otherwise it’s up to your hired gun to do all the dirty work — filling out forms, calculating deductions, and sending it off to the IRS.

And, if you choose correctly, it will have been done better than any software or filing on your own.

Speaking of which…

3. Do-It-Yourself the Old Fashioned Way

Difficulty: Hard
Price: Cheap
Quality: Depends

If you’re on a really tight budget, you may consider doing your taxes yourself… from scratch. That means no software, no professional help. Just you, the IRS’ instructions, and your paperwork.

To me, that sounds like a slow death. But maybe you feel confident in your abilities and want to save a few bucks. If you took an accounting class in college and are up for the challenge, then by all means, take this route. You’ll save some money, but know there are significant drawbacks:

  • It takes more time
  • It takes substantially more effort
  • You may lose track of forms
  • You may file incorrectly
  • You may miss deductions you qualify for

Bottom line: you might lose out on more money than you save.

Then again, I’m not you. I don’t know how good you are at filling out forms or how closely you track your finances or how much research you’ve done on the tax code. Ultimately, it’s your choice.

If you do decide to go the do-it-yourself route, you can do the actual filing on the IRS’ eFile website or the plain old fashioned way with paper mail.

7 Pieces of Advice for Preparing Your Taxes to File

Before you fill out the forms — whichever method you decide to go with — consider some of these pieces of advice:

1. Use last year’s taxes as a compass

It’s helpful to have last year’s taxes nearby for guidance as you file for this year. You can use the previous year as a reference for:

  • How much you should owe
  • How you previously filled out certain forms
  • What’s deductible this year
  • And more…

If you have a question about a part of a form, you can reference your previous year. Perhaps you ran into the same problem last year, resolved it, and simply forgot about how to handle it.

Plus, using last year’s taxes is a good way to go along and fill out a lot of the information you don’t want to have to look up again. This is also a technique tax software uses — they’ll import previous filings to help fill out a substantial amount of information to save you time.

2. Take notes as you go along

You’re smart so you’re going to follow the advice I gave earlier and collect as much paperwork as you have related to your finances.

If you’re super smart, you would also grab a pen and take notes on these forms as you go along.

As you start adding in deductions from receipts or statements, make quick reminders about what the deduction was for. For instance, if you are deducting a FilmTools order, you might write “Expendables purchase for MOVIE NAME in June” This has two effects: it helps you keep track of what you’ve already deducted and it will help if the IRS decides to audit you.

3. Research special write-offs

Each year, there are a varying amount of new deductions, write-offs, and credits. Sometimes they are the same, but other times they are different. Sometimes they are only good for one year, while other times they will be implemented over the course of multiple years.

Before you finish making all those deductions, take a trip to your friend Google and find out what special credits you may qualify for in the current tax year.

You may be surprised at what you find.

4. Start early

The last thing you want when doing taxes is to wait until the last minute and rush to get them done. I understand they’re incredibly boring and not fun, but starting them early allows you to space out the time it takes to complete them.

It also gives you peace of mind that they’re in on time and already done.

I like to have time before I file because I can slowly go through my finances, records, and be absolutely positive that everything is in order. I also value the extra weeks to budget what I owe the government leading up to my actual filing.

This is a luxury I wouldn’t have if I started them the night before.

I know it’s tempting to wait until the fire is under your ass, but it’s a lot better if you just rip the Band-Aid off and do them. Plus, it helps avoid any last-minute mistakes, accidents, or happenings that may prevent you from finishing in time.

5. Don’t be intimidated

A lot of people loathe taxes because they actually fear them — they are intimidated by the tax code and worried they’ll do something wrong.

If you’re one of those people, you’re not alone. I used to feel this way, too. IRS forms have a way of making everything seem super-important, overly-official, and extremely complicated. The explanations do little to ease your anxiety and, if anything, complicate the understanding.

But I’m here to tell you it’s OK.

Yeah the forms are official and filing them correctly is important, but it’s genuinely not too difficult, especially if you seek professional help or use guided tax software.

If, worst case scenario, you find yourself on the verge of a panic attack, don’t be afraid to ask for help. You’re a freelancer after all, not a CPA — you aren’t expected to be an expert.

6. Don’t get too angry about how much you owe

Getting angry about how much you owe the government is a natural response for many people who file taxes. After all, it’s hard to justify sending so much money to a government that seems to spend it so poorly! Regardless of how the government spends it, nobody likes to see money leave their bank account and go into a giant pot where, really, you aren’t entirely sure where your money is going.

Basically, it sucks to lose money you’ve earned. I get it. I do.

But consider what owing money means (provided you don’t owe back taxes): you made money.

And if that doesn’t calm you down, then shift your anger into a forward direction. The taxes for this past year are done. You can’t alter the law retroactively and you aren’t going to adjust what you owe. You have to pay it.

So that’s why I say don’t get too angry — it’s OK to want reform, or changes, or to be annoyed at the government taking your money. If that’s your prerogative, cool.

But you can’t change what you owe now. Be happy you make enough to have the IRS interested.

7. Deduct. Everything. You. Can.

As we discussed above, if you aren’t having income tax withheld from each paycheck, you’re unlikely to get a return. Your best shot at getting money back (or owing less money) is to take advantage of itemized deductions.

Now I don’t mean “take advantage” like you used to take advantage of the “Take One” buckets of Halloween candy as a kid (more like “Take One Handful”).

No, I mean take advantage in the sense that deductions are legal and expected to be used. You’re not scamming anybody by using them — as long as you are truthful. Did you buy a computer in the past year? Do you use it to update your website? Or to edit projects for clients? Then it’s a business expense and you should deduct it.

At first, deductions can seem dirty — like you’re deceiving the government — but they’re clean if you use them correctly.

My best advice is to deduct everything you can. Even a $5 pack of pens you used to fill out camera reports is worth listing. I mean, five bucks is five bucks, right?

The thing is, nobody cares about saving your money more than you do.

It may seem laborious at first, especially if you didn’t make any big purchases, but it’s worth it. You slowly erode away that amount you owe — $1 here; $8 there. And while it may not seem like much initially  as you chip and chip and chip you can eventually save several hundred dollars.

So chip away.

Next Up in the Series

Now that we’ve covered getting started and preparing to file your taxes, we’re going to shift gears from “what to do” to “what not to do.” The next post in this series is all about tax pitfalls — mistakes, obstacles, and the common misconceptions that could cost you money (or cause an audit).

Do you have any getting started tax tips? What’s your process for preparing to file? Do you have any method to your tax madness? Please share in the comments!