Freelance taxes. It’s never a fun subject, but it’s an important one for any independent marketer.
When you’re employed, taxes are simple, right? A new year rolls around, you get your W2 (T4 for Canadians) from your employer and use a DIY tax software to file your annual return.
This year, whether you call yourself a subcontractor, gig worker, freelancer, consultant or accidental entrepreneur, for tax purposes you’re a business owner.
Maybe you haven’t kept track of expenses all year. Or you don’t have receipts—or aren’t sure where they are. Maybe you’ve stuffed everything in a shoebox, and the thought of going through that makes you sweat. You have no idea how much money you’ve made or you haven’t put anything aside for taxes.
Taxes lead to anxiety. I get it.
However, take a deep breath. There’s no reason to panic. Here are the information, tools, and methodologies you need to get your taxes in order once and for all*.
Before we dive in, be sure to create a spreadsheet for the year (Google, Excel, Numbers) where you’ll track all the below information.
Now, let’s get started.
How to do taxes as a freelancer: the Shoebox-Be-Gone Method in 5 easy steps
Paying taxes as a freelancer means you have to stay extra organized. But if you keep things in order throughout the year, tax time will be much easier. Here are 5 steps for staying organized for freelance taxes.
1. Track all your freelance income
All work income is taxable and must be reported. Yes, even token amounts you received for work you undercharged for. Yes, even if you didn’t receive a 1099 form. Yes, even if you were paid in cash. (But no, not the couch you sold on Facebook Marketplace.)
Do this now:
- Go through your Venmo, PayPal, and bank accounts and export or print out** a list of all deposits related to work.
- Add these amounts to a column in your spreadsheet with the heading “income.”
- Create a folder (physical and/or digital) and save copies of contracts, relevant emails, and screenshots that detail what these funds paid for.
Your process going forward:
- Print or save each payment’s details, photos of any checks received, and relevant emails.
- Keep these documents and details in a dedicated folder and enter the amounts in a new spreadsheet every year.
- At minimum, keep track of payments received (and what for) in your calendar so you’ll be able to easily find the associated account deposit information when you’re ready.
2. Keep records of business expenses
Being in business as a freelancer means you have expenses. For example, you can deduct the cost of your internet and cell phone. You can also deduct office supplies, software, computer equipment, membership fees to various platforms used to network and recruit clients, and more. See item #3 below for the specifics on how to account for home office-related expenses on your freelancer tax return.
Pro tip: Set up your spreadsheet expense columns so they match expense types on your Schedule C (US) or T2125 (Canada). This makes it easier and quicker to complete your tax forms.
Do this now:
- Save copies of your monthly bills in your taxes folder.
- Go through your various expenses (web and email hosting, software access, membership sites, etc) and save a list of orders or payments made during the year.
- Add these amounts to appropriate columns in your spreadsheet.
Your process going forward:
- Keep monthly copies of your cell phone and internet bills.
- Save copies of receipts for your purchases and payments.
- Keep these documents in an expense folder and enter the amounts in the relevant columns of your freelance tax spreadsheet.
3. For remote freelancers: Don’t forget about home office expenses
If you worked mostly from home, you can claim a portion of your household expenses. The allowable percentage is based on the square footage of your office versus the home. For example, if your home is 2,000 square feet and your office is 100 square feet, the allowable amount is 5% of your household expenses. You can claim that percentage of your rent, mortgage interest, property taxes, utility bills, and major renovations.
Pro tip: If you don’t have a specific office but work in a dedicated space, 100 square feet reflects a 10×10 area, typical for a desk, chair, and basic office equipment.
4. Review bank accounts and credit card statements
As a freelancer, your bank and credit card statements hold valuable information for tax season. They can be used to support income received and expenses in the event of an audit and help you ensure you don’t forget anything come tax time.
Moreover, bank account fees are allowable expenses you can claim on your tax return. Monthly bank account and credit card annual fees, cash withdrawal fees (if used for a business expense), Interac e-transfer fees, and interest expenses (on business expense portions) can all be claimed to reduce your tax liability. Any fees withheld from payment platforms (PayPal, Venmo, etc.) can also be claimed.
Pro tip #1: Open a separate checking account for your business. Don’t pay for a business account (unless you’re incorporated)—a personal bank account will do just fine. Use this account solely for business and transfer balances to your personal checking account for personal expenses.
Pro tip #2: Having a dedicated business credit card is also a good idea. If you’re unsure if you can qualify for a second credit card, you can ask your credit card company to transfer $500 of your current credit limit to a second credit card and use this solely for business expenses. These segregated accounts make the task of differentiating between business and personal expenses much easier.
Do this now:
- Export all your bank and credit card statements and save them to a dedicated folder. This includes accounts such as Square payments, PayPal, Venmo, etc.
- Each month review your statements and highlight transactions for business and include bank fees. Enter these additional fee expense amounts in relevant columns of your spreadsheet.
Your process going forward:
- Save and review your monthly statements from all sources and enter the fees into your spreadsheet. Many people do this monthly or quarterly, but it can also be done at year-end.
5. Organize documents with freelance taxes in mind
Everyone has the equivalent of a shoebox of papers somewhere. Something small, convenient, and easily hidden from sight. Keeping everything in a shoebox does not, however, mean it must be disorganized. Simple organization tricks can keep everything in order until you are ready to tackle your freelance business finances. I can’t guarantee it’ll be fun, but it will be less stressful.
Do this now:
- Organize within your shoebox by using envelopes. Use one envelope for each expense category in your spreadsheet, one for all income, and one for your bank accounts and credit card statements.
- Separate all the receipts, invoices, and statements currently in the box and put them in their appropriate envelopes.
Your process going forward:
- Have one shoebox per year. Start a new box in January and prepare the envelopes mentioned above.
- Now you can store your receipts in the proper envelope as you get them—or at least go through them every month (set aside calendar time for this at the end of each month).
Pro tip: Organize your computer folders in a similar, logical manner. Create a folder for each year, within which you’ll create a folder for income, expenses, and bank and credit card statements. Each of these will have subfolders for document type, expense categories, and each account.
That’s it! Keep your folders and box of receipts organized. Match your spreadsheet categories to your income tax form categories. Keep both payment details and supporting documents (receipts, invoices, statement, etc.). Remember to track your home office expenses. And finally, use separate accounts for personal and business transactions.
It’s an easy system, and especially when you’re starting out as a business owner, you don’t necessarily need to invest in special accounting software or hire a bookkeeper. If your receipts and invoices match what came in and out of your accounts as well as your spreadsheet, you’re good to go. The process of completing your small business tax return as a freelancer will be much simpler, and in the event of an audit, you’ll have everything you need to prove your net income (or loss).
Good luck, Rosies! Connect with me on Linkedin and reach out with any tax or accounting related questions you may have.
* This is meant to be advice about how to track and organize your business income and expenses for eventual tax preparation. We are not acting as your CPA in this instance.
Looking for another way to make freelance taxes easier? Join the We Are Rosie community! As a Rosie, you get a whole team to support you, including with admin, networking, upskilling, and more.
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