From our ongoing discussion of How to Do Your Taxes as a Freelance Filmmaker:
As we finish this series on taxes, it only makes sense that we look ahead when you’ll have a better understanding of the tax code and be able to apply the lessons learned here more appropriately.
So the future of your taxes — good or bad — is in your hands. I suggest you pay attention…
10 Must-Do Tips for Filing Your Taxes in the Future
1. Track Everything
From here on out, if you haven’t been doing so already, track everything:
All of this data becomes extremely valuable around tax time, especially for itemized deductions. You will feel more confident in taking deductions and less likely to become a case for an audit. You will also get more money back as you keep track of expenses you usually forget about by the time tax season rolls around.
Plus, the amount of time you save by calculating as time goes on instead of all at once is enormous. Just take an afternoon at the end of every month and get your books in order. You will thank yourself later (or your accountant will).
2. Plan Big Purchases Ahead of Time
One of the greatest advantages of itemizing deductions is being able to add large purchases to the list. Things like cameras, computers, and cars, though they are depreciating assets, are really big-ticket items that give you hefty chunks of money back from the IRS.
If you’re smart, you plan these purchases ahead of time and offset a large amount of owed taxes.
For instance, let’s say you’re set to owe $500 at the end of the year, but you also want a new computer for DIT/Data Management work. If you buy one expensive enough, you deduct what you owe down to zero or possibly even into a return. The result is instead of paying X amount of money for the computer, you are paying X amount of money less $500. You essentially save $500 on the purchase price!
What this requires, however, is foresight. You have to make the computer purchase within the calendar year you’re filing taxes for. That means you’d have to know before New Year’s Eve how much you might owe.
The solution? Do your estimated taxes ahead of time and give yourself a buffer zone at the end of the year to consider making moves like these.
3. Write Notes On Your Receipts
When I went to do my taxes this year, I found a huge stack of receipts I had lying around. Most of them ended up in the garbage because I couldn’t remember what they were for and where they were from. To battle this, I’ve vowed to start writing memos on each receipt that I save.
It doesn’t have to be complicated, just a simple note like: “Lunch with DP to discuss shoot in June.”
I suggest you do the same. That way when you encounter a big bundle of receipts, you’ll know immediately how to calculate it into your deductions. And if you use an accountant or third-party to do your taxes, they won’t be ringing your phone every 5 minutes to find out what each receipt was for.
Finally, even if you do remember over the course of the year what each receipt was for, don’t forget the IRS can open an audit against you up to 3 years past your filing date. By having notes on your receipts, you don’t have to carry the burden of remembering what each purchase was for 3 years.
And if you don’t have a pen at the time of purchase, do as I said above and make notes at the end of each month on the receipts you’ve saved so far.
4. Get a Filing Cabinet
One of the best purchases you can make in the coming weeks is a filing cabinet. Or even a filing box. Anything to keep your financial paperwork organized as you collect it throughout the year.
Recently I went out to Target and bought one of these simple filing bins. In it I put four folders labeled for each quarter of 2013. Whenever I come home with a receipt, I simply put it in the applicable folder. When I receive paychecks, I put paystubs in there too. Call sheets as well.
This will be my first year using this system, but already I can tell it’s going to pay off, especially when combined with some of the other techniques here.
5. Consider Incorporating Into a Business
Since the government already treats you like a business, you might wonder what the benefits of incorporating yourself into one are. That’s a legitimate question because there are definite cons to incorporating such as fees, paperwork to file, and the intimidation factor of being a business owner.
But incorporating also has three key advantages that outweigh the disadvantages:
A.) Protection of Personal Assets: As a sole-proprietor, your personal assets are also your business assets. There is no separation between the two. That means if you were to get sued or have unpaid business debts, your personal assets could be seized to pay those funds. If, however, you are incorporated, only the business’ assets would be open to seizure.
B.) Safer Accounting Practices: By incorporating, you can open a business banking account to keep your business and personal expenses separate. Not only does this make accounting easier and less time-consuming, but it also makes your tax filings safer in the face of an audit.
C.) Respect and Professionalism: If your type of freelancing means dealing with clients, the professionalism of operating as a corporation holds meaningful value. Clients may be skeptical when dealing with a single person thinking there is a level of inexperience or lack of professionalism. Meanwhile, if your invoices have a company name, they may offer you more respect.
With that said, incorporating may not be suitable for all cases. If, for instance, you are just starting out as a freelancer, the fees associated with forming a business may be prohibitive for you. Or if you’re a below-the-line camera assistant who doesn’t deal with clients, you may not prefer to go through the hassle of incorporation.
That’s why this tip is just to consider it. Do some research. Look into the differences between LLCs, S-Corps, C-Corps, and decide whether it’s an avenue worth pursuing for your particular situation.
6. Use Separate Bank Accounts
The easiest way to keep track of business expenses versus personal expenses is to keep them separate. That way cash flows in and out of the accounts without mixing and creating confusion (i.e. “Was this gas receipt for that one shoot or my trip to Florida?”)
If you incorporate, you’ll have the advantage of having a business bank account and probably a business credit or debit card.
But if you decide not to incorporate, you can still have these advantages: open a separate checking account at your bank and attach a debit card to it. Opening a new account should be inexpensive or free as long as you have a good relationship with your bank. Use the debit card only for film-related expenses and be diligent about that!
If you do this, you’ll thank yourself later when you can pull up the statement for that bank account and start deducting everything from it. Boom. How simple is that?
7. Adjust the Amount of Estimated Taxes You Pay
Nothing hurts more than calculating your taxes and finding out you owe money — a lot of money. It happened to me this year and I felt like I was punched in the gut when I saw the number on my computer screen.
I don’t wish that feeling on anyone nor the burden of having to dole out a big chunk of change like that all at once. That’s why you should think about paying larger estimated taxes to bring down that number and split it up over the four financial quarters.
Similarly, if your return was massive this year, why not pay a smaller amount of estimated taxes? That way you’ll have the money throughout the year when it might be needed in an emergency or unexpected circumstance. Also, by paying too much money to the government, you are losing out on interest accrued had you kept that money in your bank account or stocks.
Wherever your barometer lies, consider adjusting it so the needle hits closer to zero.
8. Use Financial Planning Apps
These days, with all of our finances going through the Internets, there’s a lot of data that can be mixed, mashed, collated, and charted. You need to start taking advantage of that.
Already your bank may offer graphical financial statements or summaries that help you get a better idea of where your finances are going and how you can better manage them.
If not, there are tons of excellent third-party solutions. I personally use Mint.com and highly recommend it. It helped me a lot this tax season when I wanted to see how much money I spent on overall categories like web hosting or with specific vendors like FilmTools.
These are great tools and give you access to valuable data about your spending habits. Don’t let that go to waste this year. At the very least, they will let you generate spending reports that can be used for your itemized deductions.
9. Prepare Your Taxes Earlier
You could say procrastination is a little hobby of mine, so I completely understand those of you who have put off filing your taxes until the last minute. Even now as I write this, I still haven’t officially filed mine (they’re done, but I have yet to “Submit”).
One goal we can all work harder on is preparing our taxes earlier. You should make it a point to get to them sooner than you have before.
(For those of you who already prepare early, good job!)
This provides piece of mind, flexibility to explore deductions deeper, and the ability to compensate your budget for any penalties or larger-than-expected payments. You also don’t want to wait until the last minute in case something happens that prevents you from giving your taxes the time needed leading up to the filing deadline.
For freelancers specifically, filing earlier works better for your schedule. That way you can accept last-minute gigs without the burden of squeezing your taxes in after a long day on set.
10. Give Proper Attention to Your Finances
Paying your taxes shouldn’t be an exercise in surprise. Sure you may not know the exact amount you’ll owe or get returned, but you should have a general idea.
If you don’t, you aren’t giving enough attention to your finances.
As you fill out paperwork for shoots, read through them and try to understand what they mean. Ask questions if you aren’t sure. Poke and prod and read through paystubs to make sure you aren’t getting screwed over.
The last thing you want is to file your taxes and find out you don’t have enough money to pay them. Or, conversely, have spent a majority of your year stretching a budget only to find out a bunch of money was being held by the IRS.
I’m not asking you to become a certified accountant, but I am urging you to gain control of your financial situation in a responsible way. That will be the most helpful thing you can do this year to help you with next year’s taxes.
Understanding where your money comes from, where it goes, how it’s spent, and how to manage it will enable you to wade through the waters of the tax code with relative ease in a way that you weren’t able to this year.
That’s what this whole series is about — gaining control of the tax process through understanding.
Are You Still Alive In There?
After all, how will you enjoy the fruits of your creative success if you mismanage the money you make? Plus, the better you manage your money (and your taxes), the more freedom you’ll have in your creative endeavors.
It all feeds into itself.
The business side, the money side, it starts with your taxes. Do them right and you’ll learn valuable lessons about keeping track of costs, saving receipts, deducting expenses, filing quarterly, and more.
I know it’s hard to spend a week thinking about taxes (trust me, I wrote the posts), but don’t ignore this topic simply because it’s boring to you. Taxes may not be exciting, but the creative opportunities that are opened by money?
That’s something you can stay awake for.
Finally, thanks for reading this series! It’s been quite a ride. We learned about what to expect with taxes, the basics of filing them, pitfalls to avoid, deductions to take, and how to prep for next year.
I sincerely hope you enjoyed it. If you did, please share the series with your freelancing friends and leave a comment with feedback about what you liked and any tips of your own.